株探米国株
英語
エドガーで原本を確認する
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-33137
emergent logo gray + carmine r.jpg
EMERGENT BIOSOLUTIONS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 14-1902018
(State or Other Jurisdiction of
Incorporation or Organization)		 (I.R.S. Employer
Identification No.)
 
400 Professional Drive Suite 400
Gaithersburg, MD 20879
(Address and zip code of Principal Executive Offices)
(240) 631-3200
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, par Value $0.001 per share EBS New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 1, 2023, the registrant had 51,884,398 shares of common stock outstanding.


Emergent BioSolutions Inc. and Subsidiaries
Form 10-Q
TABLE OF CONTENTS
Page
 
 
 
 
 
 
 
2
EMERGENT BIOSOLUTIONS INC.
PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding our future performance, business strategy, operations, financial position, revenues and earnings, projected costs, prospects, plans and objectives of management are forward-looking statements. We generally identify forward-looking statements by using words like "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "future," "goal," "intend," "may," "plan," "position," "possible," "potential," "predict," "project," "should," "target," "will," "would," and similar expressions or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements. Forward-looking statements are based on our current intentions, beliefs, assumptions and expectations regarding future events based on information that is currently available. You should realize that if underlying assumptions prove inaccurate or if known or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. You are therefore cautioned not to place undue reliance on any forward-looking statement contained herein. Any forward-looking statement speaks only as of the date on which such statement is made and, except as required by law, we do not undertake any obligation to update any forward-looking statement to reflect new information, events or circumstances.
There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements, including, among others:
•the availability of U.S. Government ("USG") funding for contracts related to procurement of our medical countermeasures ("MCM"), including CYFENDUSTM (Anthrax Vaccine Adsorbed (AVA), Adjuvanted), previously known as AV7909, BioThrax® (Anthrax Vaccine Adsorbed), ACAM2000® (Smallpox (Vaccinia) Vaccine, Live) among others, as well as contracts related to development of medical countermeasures;
•the availability of government funding for our other commercialized products, including EbangaTM (ansuvimab-zykl), BAT® (Botulism Antitoxin Heptavalent) and RSDL® (Reactive Skin Decontamination Lotion Kit);
•our ability to meet our commitments to quality and compliance in all of our manufacturing operations;
•our ability to negotiate additional USG procurement or follow-on contracts for our MCM products that have expired or will be expiring;
•the commercial availability and acceptance of over-the-counter NARCAN® (naloxone HCl) Nasal Spray;
•the impact of a generic marketplace on NARCAN® (naloxone HCl) Nasal Spray and future NARCAN® sales;
•our ability to perform under our contracts with the USG, including the timing of and specifications relating to deliveries;
•our ability to provide contract development and manufacturing ("CDMO") services for the development and/or manufacture of product and/or product candidates of our customers at required levels and on required timelines;
•the ability of our contractors and suppliers to maintain compliance with current good manufacturing practices and other regulatory obligations;
•our ability to negotiate further commitments related to the collaboration and deployment of capacity toward future commercial manufacturing under our existing CDMO contracts;
•our ability to collect reimbursement for raw materials and payment of service fees from our CDMO customers;
•the results of pending stockholder litigation and government investigations and their potential impact on our business;
•our ability to comply with the operating and financial covenants required by our revolving credit facility (the "Revolving Credit Facility") and our term loan facility (the "Term Loan Facility" and, together with the Revolving Credit Facility, the "Senior Secured Credit Facilities") under a senior secured credit agreement, dated October 15, 2018, between the Company and multiple lending institutions, as amended from time to time, as well as our 3.875% Senior Unsecured Notes due 2028 ("Senior Unsecured Notes");
•our ability to remediate a material weakness in our internal control over financial reporting and to prepare accurate financial statements in a timely manner;
•our ability to resolve the going concern qualification in our consolidated financial statements and otherwise successfully manage our liquidity in order to continue as a going concern;
•the procurement of our product candidates by USG entities under regulatory authorities that permit government procurement of certain medical products prior to United States Food and Drug Administration (“FDA”) marketing authorization, and corresponding procurement by government entities outside of the United States;
•our ability to realize the expected benefits of the sale of our travel health business to Bavarian Nordic;
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EMERGENT BIOSOLUTIONS INC.
•the impact of the organizational changes we announced in January 2023 and August 2023;
•the success of our commercialization, marketing and manufacturing capabilities and strategy;
•our ability to identify and acquire companies, businesses, products or product candidates that satisfy our selection criteria;
•the impact of cyber security incidents, including the risks from the unauthorized access, interruption, failure or compromise of our information systems or those of our business partners, collaborators or other third parties; and
•the accuracy of our estimates regarding future revenues, expenses, capital requirements and needs for additional financing.
The foregoing sets forth many, but not all, of the factors that could cause actual results to differ from our expectations in any forward-looking statement. When evaluating our forward-looking statements, you should consider this cautionary statement along with the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q, as well as the risks identified in our other reports filed with the SEC. New factors may emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
NOTE REGARDING COMPANY REFERENCES
References in this report to “Emergent,” the “Company,” “we,” “us,” and “our” refer to Emergent BioSolutions Inc. and its consolidated subsidiaries.
NOTE REGARDING TRADE NAMES
Emergent®, CYFENDUSTM, BioThrax®, RSDL®, BAT®, Trobigard®, Anthrasil®, CNJ-016®, ACAM2000®, NARCAN®, TEMBEXA® and any and all Emergent BioSolutions Inc. brands, products, services and feature names, logos and slogans are trademarks or registered trademarks of Emergent BioSolutions Inc. or its subsidiaries in the United States or other countries. EBANGA™ is a trademark of Ridgeback Biotherapeutics L.P. All other brands, products, services and feature names or trademarks are the property of their respective owners.
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ITEM 1. FINANCIAL STATEMENTS
Emergent BioSolutions Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except per share amounts)
  September 30, 2023 December 31, 2022
(unaudited) (As Restated)
ASSETS  
Current assets:    
Cash and cash equivalents $ 87.8  $ 642.6 
Accounts receivable, net 216.5  159.2 
Inventories, net 354.1  350.7 
Prepaid expenses and other current assets 62.4  57.9 
Total current assets 720.8  1,210.4 
Property, plant and equipment, net 395.4  817.6 
Intangible assets, net 582.8  728.8 
Goodwill —  218.2 
Other assets 194.1  191.3 
Total assets $ 1,893.1  $ 3,166.3 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 112.7  $ 103.5 
Accrued expenses 17.0  34.9 
Accrued compensation 82.5  87.3 
Debt, current portion 413.6  957.3 
Other current liabilities 38.2  45.9 
Total current liabilities 664.0  1,228.9 
Debt, net of current portion 448.2  448.5 
Deferred tax liability 52.4  59.7 
Other liabilities 31.3  41.5 
Total liabilities 1,195.9  1,778.6 
Stockholders' equity:
Preferred stock, par value $0.001 per share; 15.0 shares authorized, no shares issued or outstanding
 —  — 
Common stock, par value $0.001 per share; 200.0 shares authorized, 57.4 and 55.7 shares issued; 51.8 and 50.1 shares outstanding, respectively
 0.1  0.1 
Treasury stock, at cost, 5.6 and 5.6 common shares, respectively
 (227.7) (227.7)
Additional paid-in capital 899.7  873.5 
Accumulated other comprehensive income (loss), net (2.6) 3.1 
Retained earnings 27.7  738.7 
Total stockholders’ equity 697.2  1,387.7 
Total liabilities and stockholders’ equity $ 1,893.1  $ 3,166.3 
See accompanying notes to condensed consolidated financial statements.
5

Emergent BioSolutions Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited, in millions, except per share amounts)
 
 Three Months Ended September 30, Nine Months Ended September 30,
 
 2023 2022 2023 2022
(As Restated) (As Restated)
Revenues:    
Product sales, net $ 249.8  $ 186.2  $ 695.4  $ 660.5 
Contract development and manufacturing (“CDMO”):
Services 13.2  36.1  52.2  87.8 
Leases 1.0  0.2  5.5  4.7 
Total CDMO revenues 14.2  36.3  57.7  92.5 
Contracts and grants 6.5  17.4  19.6  34.3 
Total revenues 270.5  239.9  772.7  787.3 
Operating expenses:
Cost of product sales 132.5  85.2  368.6  256.8 
Cost of CDMO 44.3  62.0  151.7  215.8 
Goodwill impairment 218.2  —  218.2  — 
Impairment of long-lived assets —  —  306.7  — 
Research and development 15.3  42.2  82.0  141.3 
Selling, general and administrative 86.0  81.8  278.7  246.1 
Amortization of intangible assets 16.3  14.0  49.4  42.0 
Total operating expenses 512.6  285.2  1,455.3  902.0 
Loss from operations (242.1) (45.3) (682.6) (114.7)
Other income (expense):
Interest expense (19.7) (8.5) (66.2) (24.5)
Gain on sale of business (0.7) —  74.2  — 
Other, net (3.4) (13.4) (2.1) (18.4)
Total other income (expense), net (23.8) (21.9) 5.9  (42.9)
Loss before income taxes (265.9) (67.2) (676.7) (157.6)
Income tax provision (benefit) (2.5) 19.9  34.3  (13.0)
Net loss $ (263.4) $ (87.1) $ (711.0) $ (144.6)
Net loss per common share
Basic $ (5.08) $ (1.75) $ (13.97) $ (2.88)
Diluted $ (5.08) $ (1.75) $ (13.97) $ (2.88)
Weighted average shares outstanding
Basic 51.8  49.9  50.9  50.2 
Diluted 51.8  49.9  50.9  50.2 
See accompanying notes to condensed consolidated financial statements.
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Emergent BioSolutions Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(unaudited, in millions)
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(As Restated) (As Restated)
Net loss $ (263.4) $ (87.1) $ (711.0) $ (144.6)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net 1.2  (1.3) 3.7  (0.4)
Unrealized gains (losses) on hedging activities 0.9  2.6  (2.3) 9.4 
Reclassification adjustment for losses (gains) on hedging activities (3.1) (0.4) (3.6) 1.9 
Reclassification adjustment for gains on pension benefit obligation —  —  (3.5) — 
Total other comprehensive income (loss), net of tax (1.0) 0.9  (5.7) 10.9 
Comprehensive loss, net of tax $ (264.4) $ (86.2) $ (716.7) $ (133.7)
See accompanying notes to condensed consolidated financial statements.
7
Emergent BioSolutions Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited, in millions)

 
 Nine Months Ended September 30,
2023 2022
(As Restated)
Operating Activities
Net loss $ (711.0) $ (144.6)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 19.1  33.4 
Long-term incentive plan expense 3.7  — 
Depreciation and amortization 95.5  107.6 
Change in fair value of contingent obligations, net (0.4) 2.4 
Amortization of deferred financing costs 15.6  3.1 
Deferred income taxes (3.7) 25.5 
Gain on sale of travel health business (74.2) — 
Goodwill impairment 218.2  — 
Impairment of long-lived assets 306.7  — 
Other 8.9  13.0 
Changes in operating assets and liabilities:
Accounts receivable (58.5) 82.5 
Inventories (25.0) (102.8)
Prepaid expenses and other assets (18.3) (34.3)
Accounts payable 17.7  (11.8)
Accrued expenses and other liabilities (30.2) (48.4)
Accrued compensation (0.8) (5.7)
Income taxes receivable and payable, net (3.5) (51.0)
Contract liabilities 1.8  4.2 
Net cash used in operating activities (238.4) (126.9)
Investing Activities
Purchases of property, plant and equipment (40.2) (92.2)
Asset acquisitions —  (243.7)
Milestone payment from prior asset acquisition (6.3) — 
Proceeds from sale of travel health business, net 270.2  — 
Net cash provided by (used in) investing activities 223.7  (335.9)
Financing Activities
Purchases of treasury stock —  (81.9)
Proceeds from revolving credit facility —  238.0 
Principal payments on revolving credit facility (386.8) — 
Principal payments on term loan facility (160.7) (25.3)
Proceeds from stock-based compensation activity 1.3  3.0 
Taxes paid for stock-based compensation activity (2.4) (5.7)
Proceeds from at-the-market sale of stock, net of commissions and expenses 8.2  — 
Net cash provided by (used in) financing activities: (540.4) 128.1 
Effect of exchange rate changes on cash, cash equivalents and restricted cash 0.3  (0.6)
Net change in cash, cash equivalents and restricted cash (554.8) (335.3)
Cash, cash equivalents and restricted cash, beginning of period 642.6  576.3 
Cash, cash equivalents and restricted cash, end of period $ 87.8  $ 241.0 
Supplemental disclosure of cash flow information:
Cash paid for interest $ 56.5  $ 26.7 
Cash paid for income taxes $ 38.3  $ 23.9 
Supplemental information on non-cash investing and financing activities:
Purchases of property, plant and equipment unpaid at period end $ 9.2  $ 10.0 
See accompanying notes to condensed consolidated financial statements.
8

Emergent BioSolutions Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited, in millions)
 
$0.001 Par Value
Common Stock
Treasury Stock
 Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Stockholders' Equity
Shares Amount Shares Amount
Balance at December 31, 2022 (As Restated) 55.7  $ 0.1  (5.6) $ (227.7) $ 873.5  $ 3.1  $ 738.7  $ 1,387.7 
Net loss —  $ —  —  $ —  $ —  $ —  $ (186.2) $ (186.2)
Share-based compensation activity 0.3  —  —  —  4.7  —  —  4.7 
Other comprehensive loss, net of tax —  —  —  —  —  (2.1) —  (2.1)
Balance at March 31, 2023 56.0  $ 0.1  (5.6) $ (227.7) $ 878.2  $ 1.0  $ 552.5  $ 1,204.1 
Net loss —  $ —  —  $ —  $ —  $ —  $ (261.4) $ (261.4)
Share-based compensation activity 0.3  —  —  —  9.4  —  —  9.4 
At-the-market sale of stock, net of commissions and expenses 1.1  —  —  —  8.2  —  —  8.2 
Other comprehensive loss, net of tax —  —  —  —  —  (2.6) —  (2.6)
Balance at June 30, 2023 57.4  $ 0.1  (5.6) $ (227.7) $ 895.8  $ (1.6) $ 291.1  $ 957.7 
Net loss —  $ —  —  $ —  $ —  $ —  $ (263.4) $ (263.4)
Share-based compensation activity —  —  —  —  3.9  —  —  3.9 
Other comprehensive loss, net of tax —  —  —  —  —  (1.0) —  (1.0)
Balance at September 30, 2023 57.4  $ 0.1  (5.6) $ (227.7) $ 899.7  $ (2.6) $ 27.7  $ 697.2 
9

 
$0.001 Par Value
Common Stock
Treasury Stock
 Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Stockholders' Equity
Shares Amount Shares Amount
Balance at December 31, 2021 (As Revised) 55.1  $ 0.1  (3.8) $ (152.2) $ 829.4  $ (16.1) $ 950.3  $ 1,611.5 
Net loss —  $ —  —  $ —  $ —  $ —  $ (4.6) $ (4.6)
Share-based compensation activity 0.2  —  —  —  5.4  —  —  5.4 
Repurchases of common stock —  —  (1.1) (52.2) —  —  —  (52.2)
Other comprehensive income, net of tax —  —  —  —  —  6.8  —  6.8 
Balance at March 31, 2022 (As Revised) 55.3  $ 0.1  (4.9) $ (204.4) $ 834.8  $ (9.3) $ 945.7  $ 1,566.9 
Net loss —  $ —  —  $ —  $ —  $ —  $ (52.9) $ (52.9)
Share-based compensation activity 0.2  —  —  —  14.4  —  —  14.4 
Repurchases of common stock —  —  (0.7) (23.3) —  —  —  (23.3)
Other comprehensive income, net of tax —  —  —  —  —  3.2  —  3.2 
Balance at June 30, 2022 (As Revised) 55.5  $ 0.1  (5.6) $ (227.7) $ 849.2  $ (6.1) $ 892.8  $ 1,508.3 
Net loss —  $ —  —  $ —  $ —  $ —  $ (87.1) $ (87.1)
Share-based compensation activity —  —  —  —  10.9  —  —  10.9 
Other comprehensive income, net of tax —  —  —  —  —  0.9  —  0.9 
Balance at September 30, 2022 (As Restated) 55.5  $ 0.1  (5.6) $ (227.7) $ 860.1  $ (5.2) $ 805.7  $ 1,433.0 
See accompanying notes to condensed consolidated financial statements.
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EMERGENT BIOSOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollar and share amounts in tables in millions, except per share data)

1. Nature of the business and organization
Organization and business
Emergent BioSolutions Inc., including its consolidated subsidiaries (“Emergent,” the “Company,” “we,” “us,” and “our”) is a global life sciences company focused on providing innovative preparedness and response solutions addressing accidental, deliberate, and naturally occurring Public Health Threats ("PHTs"). The Company's solutions include a product portfolio, a product development portfolio, and a contract development and manufacturing ("CDMO") services portfolio.
The Company is focused on the following four PHT categories: chemical, biological, radiological, nuclear and explosives; emerging infectious diseases; emerging health crises; and acute/emergency care. The Company has a current product portfolio of 12 products (vaccines, therapeutics, and drug-device combination products). The revenue generated by the products comprises a substantial portion of the Company's revenue. The Company structures the business with a focus on markets and customers. As such, the key components of the business structure include the following four product and service categories: Anthrax - Medical Countermeasures ("MCM") Products, NARCAN®, Smallpox - MCM Products and CDMO Services. The Company operates as two operating segments: (1) a products segment ("Products") consisting of the Anthrax - MCM products, NARCAN®, Smallpox - MCM products and Other products and (2) a services segment ("Services") focused on CDMO services. Refer to Note 17, "Segment information" for additional information.
The Company's products and services include:
Anthrax - MCM Products
•Anthrasil® (Anthrax Immune Globulin Intravenous (human)), the only polyclonal antibody therapeutic licensed by the United States Food and Drug Administration (“FDA”) and Health Canada for the treatment of inhalational anthrax in combination with appropriate antibacterial drugs;
•BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the FDA for the general use prophylaxis and post-exposure prophylaxis of anthrax disease;
•CYFENDUS™ (Anthrax vaccine adsorbed (AVA), adjuvanted), previously known as AV7909, which was recently approved by the FDA for post-exposure prophylaxis of disease following suspected or confirmed exposure to Bacillus anthracis in persons 18 through 65 years of age when administered in conjunction with recommended antibacterial drugs. CYFENDUS™ is procured by certain authorized government buyers for their use; and
•Raxibacumab injection, the first fully human monoclonal antibody therapeutic licensed by the FDA for the treatment and prophylaxis of inhalational anthrax;
NARCAN®
•NARCAN® (naloxone HCl) Nasal Spray, an intranasal formulation of naloxone approved by the FDA (including in over-the-counter form) and Health Canada for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression;
Smallpox - MCM Products
•ACAM2000®, (Smallpox (Vaccinia) Vaccine, Live), the only single-dose smallpox vaccine licensed by the FDA for active immunization against smallpox disease for persons determined to be at high risk for smallpox infection;
•CNJ-016® (Vaccinia Immune Globulin Intravenous (Human) (VIGIV)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada to address certain complications from smallpox vaccination; and
•TEMBEXA®, an oral antiviral formulated as 100 mg tablets and 10 mg/mL oral suspension dosed once weekly for two weeks which has been approved by the FDA for the treatment of smallpox disease caused by variola virus in adult and pediatric patients, including neonates.
11

Other Products
•BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), the only heptavalent antitoxin licensed by the FDA and Health Canada for the treatment of symptomatic botulism;
•Ebanga™ (ansuvimab-zykl), a monoclonal antibody with antiviral activity provided through a single IV infusion for the treatment of Ebola. Under the terms of a collaboration with Ridgeback Biotherapeutics ("Ridgeback"), Emergent will be responsible for the manufacturing, sale, and distribution of Ebanga™ in the U.S. and Canada, and Ridgeback will serve as the global access partner for Ebanga™;
•RSDL® (Reactive Skin Decontamination Lotion Kit), the only medical device cleared by the FDA that is intended to remove or neutralize chemical warfare agents from the skin, including: tabun, sarin, soman, cyclohexyl sarin, VR, VX, mustard gas and T-2 toxin; and
•Trobigard® atropine sulfate, obidoxime chloride auto-injector, a combination drug-device auto-injector procured product candidate that contains atropine sulfate and obidoxime chloride. Trobigard® was approved in Belgium in 2021 but has not been approved by the FDA. Trobigard® is procured by certain authorized government buyers under special circumstances for potential use as a nerve agent countermeasure outside of the U.S.
Sale of Travel Health Business
On May 15, 2023, the Company completed the sale of its products segment's travel health business, including rights to Vivotif®, the licensed typhoid vaccine; Vaxchora®, the licensed cholera vaccine; the development-stage chikungunya vaccine candidate CHIKV VLP; the Company’s manufacturing site in Bern, Switzerland; and certain of its development facilities in San Diego, California. For additional information, refer to Note 3, "Divestiture".
Services - Contract Development and Manufacturing
The Company's services line focused on CDMO offerings cover development services, drug substance manufacturing, drug product manufacturing, and when necessary, suite reservations, which depending on facts and circumstances could be considered a lease. These services are provided to customers from across the pharmaceutical and biotechnology industries as well as the U.S. Government (“USG”) and non-governmental organizations. The Company's technology platforms include mammalian, microbial, viral, plasma and advanced therapies utilizing the Company's core capabilities for manufacturing to third parties on a clinical and commercial (small and large) scale. Additional services include fill/finish formulation and analytical development services for injectable and other sterile products, inclusive of process design, technical transfer, manufacturing validations, aseptic filling, lyophilization, final packaging and stability studies, as well as manufacturing of vial and pre-filled syringe formats on multiple platforms. In August 2023, the Company initiated an organizational restructuring plan (the “August 2023 Plan”) which included actions to reduce investment in and de-emphasize focus on its CDMO services business.
2. Summary of significant accounting policies
Basis of presentation and consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Emergent and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on December 11, 2023.
In connection with the 2022 adjustments described in Note 18, “Adjustments to quarterly financial data”, there were immaterial adjustments, both individually and in the aggregate, that impacted the Company’s 2023 quarterly filings for the periods ended March 31, 2023 and June 30, 2023. All other adjustments contained in the accompanying unaudited condensed consolidated financial statements are of a normal recurring nature and are necessary to present fairly the financial position of the Company as of September 30, 2023. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.
12

Going concern
As of September 30, 2023, there is $211.2 million outstanding on the Company's Revolving Credit Facility and $202.1 million on Term Loan Facility that matures in May 2025. The Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation considered the mitigating effect of management’s plans that have been implemented as of September 30, 2023. Management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company's plans include (A) amending the agreement for the Senior Secured Credit Facilities, which occurred on May 15, 2023, with the Fourth Amendment to Amended and Restated Credit Agreement, Waiver and First Amendment to Amended and Restated Collateral Agreement (the “Credit Agreement Amendment”), and (B) the execution of the capital raise requirement prescribed in the Credit Agreement Amendment, as further described below.
While the Company executed the Credit Agreement Amendment and extended the maturity date on the Senior Secured Credit Facilities to May 15, 2025, the Credit Agreement Amendment also requires the Company maintain a minimum consolidated EBITDA through February 29, 2024 and to raise at least $75.0 million through the issuance of equity and/or unsecured indebtedness by April 30, 2024. As a result of these provisions, the Company has determined it is appropriate to continue to classify the debt as a current liability on the Condensed Consolidated Balance Sheets. Additional information on the nature and status of our debt covenant compliance is included below.
Debt Covenants
The Company has a senior secured credit facility that matures in May 2025 (the “Credit Facility”) which provides for (1) revolving credit commitments, (2) a term loan, and (3) the issuance of commercial letters of credit. As of September 30, 2023, we had $413.3 million outstanding under the Credit Facility. Under the Credit Facility, the Company is subject to a monthly minimum consolidated EBITDA covenant through February 29, 2024 and is also required to raise at least $75.0 million through the issuance of equity and/or unsecured indebtedness by April 30, 2024. As of September 30, 2023, we were in compliance with all of the covenants and restrictions associated with, and no events of default existed under, the Credit Facility. However, based on the timing of the USG procurement of the remaining 2023 order for CYFENDUSTM and a number of other product sales through the end of 2023, the Company anticipates that, absent a cure or waiver, it may be in breach of the minimum consolidated EBITDA covenant as early as the reporting date for the measurement period ending December 31, 2023. In the event the Company remains in compliance with the minimum consolidated EBITDA covenant through the measurement period ending December 31, 2023, the Company anticipates that, absent a cure or waiver of the minimum consolidated EBITDA covenant, it may be in breach of the minimum consolidated EBITDA covenant as early as the reporting date for the measurement period ending February 29, 2024. In addition, the Company is required to deliver audited annual financial statements without a “going concern” or like qualification or exception with respect to our financial statements for the year ended December 31, 2023 within 90- days of year end. The Credit Facility and the Company’s other debt facilities are described in more detail below in Note 10, “Debt” and in Note 9, “Debt” in Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
If the Company is not compliant with the covenants an event of default may occur under the Credit Facility and the agent and requisite lenders thereunder could take actions to exercise certain rights and remedies as described in the Credit Facility. Further, acceleration of the Credit Facility would result in a cross-default of the Company’s obligations under the 3.875% Senior Unsecured Notes due in 2028. If the Company would be unable to obtain a waiver or forbearance of such covenants or defaults, to successfully renegotiate the terms of the Credit Facility, or to cure the potential covenant breach or default, and the lenders enforced one or more of their rights upon default and/or the default resulted in a cross-default under certain other of the Company’s debt instruments, the Company would be unable to meet its obligations and could be forced into insolvency proceedings.
Based on the facts and circumstances described above, management cannot make the assumption that it is probable that these debt covenants will be met. As a result, the Company continues to evaluate a number of uncertain factors related to its assessment of its ability to satisfy the capital raise requirement, including its ability to comply with the terms and operating and financial covenants required by the Senior Secured Credit Facilities, other market conditions, economic conditions, particularly in the pharmaceutical and biotechnology industry, and disruptions or volatility caused by factors such as regional conflicts, inflation, and supply chain disruptions. The Company has engaged legal and financial advisors to assist with a comprehensive review of alternatives to enhance its capital structure, which may include taking steps to cure any potential defaults or seeking forbearance, waivers, further cost reductions or other alternatives to avoid an event of default.
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The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Revenue recognition
Beginning in the third quarter of 2023, the Company launched the over-the-counter NARCAN® (naloxone HCl) Nasal Spray, 4mg (“NARCAN® OTC”), which was approved by the FDA as an over-the-counter emergency treatment of opioid overdose, broadening our customer base and sales channels to retail pharmacies and digital commerce websites. Refer to Note 13, "Revenue recognition" for more information regarding revenue recognition accounting policies related to NARCAN® OTC product sales.
Pre-launch inventory
Within the Company's Products segment, costs relating to raw materials and production of inventory in preparation for product launch prior to regulatory approval are capitalized when the review process has progressed to a point where objective and persuasive evidence exists that regulatory approval is probable, the future economic benefit is expected to be realized, and the Company believes that material uncertainties related to the ultimate regulatory approval have been significantly reduced. Pre-launch inventory is recorded to research and development expense unless these criteria are met. For pre-launch inventory that is capitalized, the Company considers a number of specific facts and circumstances, including the product candidate’s current status in the drug development and regulatory approval process, results from related clinical trials, results from meetings with relevant regulatory agencies prior to the filing of regulatory applications, potential obstacles to the approval process, historical experience, viability of commercialization and market trends. This policy is not applicable to pre-launch inventory purchased to satisfy a performance obligation related to a CDMO contract as CDMO pre-launch inventory may be capitalized if it has future economic benefit based on the terms of the contract.
Significant accounting policies
With the exception of the policies on revenue recognition and pre-launch inventory discussed above, there have been no significant changes to the Company's summary of significant accounting policies during the nine months ended September 30, 2023, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that have materially impacted the presentation of the Company's financial statements.
Fair value measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, includes:
Level 1 — Observable inputs for identical assets or liabilities such as quoted prices in active markets;
Level 2 — Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 — Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use.
On a recurring basis, the Company measures and records money market funds (Level 1), interest-rate swap arrangements and time deposits (Level 2) and contingent purchase consideration (Level 3) using fair value measurements in the accompanying financial statements. The carrying amounts of the Company's short-term financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities. The carrying amounts of the Company’s long-term variable interest rate debt arrangements (Level 2) approximate their fair values.
New accounting standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board that the Company adopts as of the pronouncement's specified effective date. There were no new accounting pronouncements that were issued or became effective since the issuance of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 that had, or are expected to have, a material impact on its consolidated financial position, results of operations or cash flows.
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3.     Divestiture
On May 15, 2023, pursuant to the Purchase and Sale Agreement (the “Purchase and Sale Agreement”), by and between the Company, through its wholly owned subsidiaries Emergent International Inc. and Emergent Travel Health Inc., and Bavarian Nordic ("Bavarian Nordic”), the Company completed the previously announced sale of the Company’s travel health business, including rights to Vivotif®, the licensed typhoid vaccine; Vaxchora®, the licensed cholera vaccine; the development-stage chikungunya vaccine candidate CHIKV VLP; the Company’s manufacturing site in Bern, Switzerland; and certain of its development facilities in San Diego, California.
At the closing, Bavarian Nordic paid a cash purchase price of $270.0 million, exclusive of customary closing adjustments for cash, indebtedness, working capital and transaction expenses of the business at closing. Bavarian Nordic may also be required to pay milestone payments of up to $80.0 million related to the development of CHIKV VLP and receipt of marketing approval and authorization in the U.S. and Europe, and earn-out payments of up to $30.0 million based on aggregate net sales of Vaxchora and Vivotif in calendar year 2026.
As a result of the divestiture, during the nine months ended September 30, 2023, the Company recognized a pre-tax gain of $74.2 million, net of transaction costs of $4.0 million recorded within "Gain on sale of business" on the Condensed Consolidated Statements of Operations. During the three months ended September 30, 2023, a measurement period adjustment of $0.7 million was recognized, which reduced the gain. The reduction represents a working capital adjustment, payable to Bavarian Nordic.
The Company determined that the disposal of the travel health business does not qualify for reporting as a discontinued operation since it does not represent a strategic shift that has or will have a major effect on our operations and financial results. No adjustments were made to prior period results as a result of the disposal.
In connection with the divestiture, the Company entered into a Transition Services Agreement (“TSA”) with Bavarian Nordic to help support its ongoing operations. Under the TSA, the Company provides certain transition services to Bavarian Nordic, including information technology, finance and enterprise resource planning, research and development, human resources, employee benefits and other limited services. Income from performing services under the TSA was recorded within "Other, net" on the Condensed Consolidated Statements of Operations and was $1.2 million and $2.2 million for the three and nine months ended September 30, 2023, respectively.
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4.     Long-lived asset impairment and restructuring charges
Impairment of long-lived assets
The Company tests its long-lived assets that are held and used for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable.
During the second quarter of 2023, due to deterioration in performance and resulting downward revisions to our internal CDMO forecast made during the second quarter, including future expected cash flows, the Company determined there were sufficient indicators of impairment on certain asset groups within the CDMO reporting unit to require an impairment analysis. As a result, the Company performed recoverability tests on certain asset groups within the CDMO reporting unit and concluded that the impacted asset groups were not recoverable as the undiscounted expected cash flows did not exceed their carrying values.
Asset groups are written down only to the extent that their carrying value is higher than their respective fair value. The Company, with the assistance of a third-party valuation firm, applied valuation methods to estimate the fair values for each of the assets within the different asset classes. An orderly liquidation value was applied to estimate the fair value of the personal property assets and market and cost based approaches were applied to estimate the fair value of the real property assets. All of the valuation approaches applied represented Level 3 non-recurring fair value measurements. Based on this analysis, the Company allocated and recognized a non-cash impairment charge of $306.7 million during the nine months ended September 30, 2023.
The table below presents the total impairment charge by asset class for the three and nine months ended September 30, 2023:
Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023
Buildings, building improvements and leasehold improvements $ —  $ 81.5 
Furniture and equipment —  117.5 
Software —  0.3 
Construction-in-progress —  107.4 
Total impairment of long-lived assets $ —  $ 306.7 
January 2023 Organizational Restructuring Plan
In January 2023, the Company initiated an organizational restructuring plan (the “January 2023 Plan”) intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. As part of the January 2023 Plan, the Company reduced its workforce by approximately 125 employees. The Company made a $(0.2) million adjustment to the incurred charges in connection with the January 2023 Plan during the three months ended September 30, 2023 and incurred approximately $9.4 million in charges during the nine months ended September 30, 2023. These charges consist primarily of charges related to employee transition, severance payments and employee benefits. All activities related to the January 2023 Plan were substantially completed during the first quarter of 2023. Restructuring costs are recognized as an operating expense within the Condensed Consolidated Statement of Operations and are classified based on the Company's classification policy for each category of operating expense.
August 2023 Organizational Restructuring Plan
In August 2023, the Company initiated the August 2023 Plan intended to strengthen its core business and financial position by reducing investment in and de-emphasizing focus on its CDMO services business for future growth. As part of the August 2023 Plan, the Company reduced its workforce by approximately 400 employees. The Company incurred approximately $20.5 million in charges in connection with the August 2023 Plan during the three months ended September 30, 2023. These charges consist primarily of charges related to severance payments, transition services, and employee benefits. All activities related to the August 2023 Plan were substantially completed during the third quarter of 2023. Restructuring costs are recognized as an operating expense within the Condensed Consolidated Statement of Operations and are classified based on the Company's classification policy for each category of operating expense.
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The following table presents the total restructuring costs associated with the Company’s segments as well as unallocated corporate and research and development ("R&D") charges for the three and nine months ended September 30, 2023:
Three Months Ended
September 30, 2023		 Nine Months Ended
September 30, 2023
Products $ 5.0  $ 7.0 
Services 8.1  8.1 
Total restructuring costs by segment 13.1  15.1 
Corporate 6.3  11.4 
R&D $ 0.9  3.4 
Total restructuring costs $ 20.3  $ 29.9 
The following table presents the total restructuring costs, by function, for the three and nine months ended September 30, 2023:
Three Months Ended
September 30, 2023		 Nine Months Ended
September 30, 2023
Employee transition $ 0.3  $ 0.6 
Severance payments 17.9  26.6 
Employee benefits 2.1  2.7 
Total restructuring costs $ 20.3  $ 29.9 
The following table provides the components of and changes in the Company's restructuring accrual for the January 2023 Plan during the three and nine months ended September 30, 2023:
Employee Transition Severance Payments Employee Benefits Total
Balance at December 31, 2022 $ —  $ —  $ —  $ — 
Accruals 0.3  8.7  0.7  9.7 
Cash payments (0.2) (2.0) (0.1) (2.3)
Balance at March 31, 2023 $ 0.1  $ 6.7  $ 0.6  $ 7.4 
Accruals —  0.1  (0.2) (0.1)
Cash payments —  (3.6) (0.1) (3.7)
Balance at June 30, 2023 $ 0.1  $ 3.2  $ 0.3  $ 3.6 
Accruals —  —  (0.2) (0.2)
Cash payments —  (1.1) —  (1.1)
Balance at September 30, 2023 $ 0.1  $ 2.1  $ 0.1  $ 2.3 
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The following table provides the components of and changes in the Company's restructuring accrual for the August 2023 Plan during the three and nine months ended September 30, 2023:
Employee Transition Severance Payments Employee Benefits Total
Balance at December 31, 2022 $ —  $ —  $ —  $ — 
Accruals —  —  —  — 
Cash payments —  —  —  — 
Balance at March 31, 2023 $ —  $ —  $ —  $ — 
Accruals —  —  —  — 
Cash payments —  —  —  — 
Balance at June 30, 2023 $ —  $ —  $ —  $ — 
Accruals 0.3  17.9  2.3  20.5 
Cash payments (0.2) (1.7) —  (1.9)
Balance at September 30, 2023 $ 0.1  $ 16.2  $ 2.3  $ 18.6 
5.    Inventories, net
Inventories, net consisted of the following:
September 30, 2023 December 31, 2022
(As Restated)
Raw materials and supplies $ 142.3  $ 142.3 
Work-in-process 146.3  116.2 
Finished goods 65.5  92.2 
Total inventories, net $ 354.1  $ 350.7 
Inventories, net is stated at the lower of cost or net realizable value.
6.    Property, plant and equipment, net
Property, plant and equipment, net consisted of the following:
September 30, 2023 (1)
 December 31, 2022
Land and improvements $ 30.0  $ 54.9 
Buildings, building improvements and leasehold improvements 228.9  327.9 
Furniture and equipment 428.5  567.5 
Software 64.0  65.6 
Construction-in-progress 44.9  185.5 
Property, plant and equipment, gross $ 796.3  $ 1,201.4 
Less: Accumulated depreciation & amortization (400.9) (383.8)
Total property, plant and equipment, net $ 395.4  $ 817.6 
(1) During the nine months ended September 30, 2023, the Company recorded a non-cash impairment charge of $306.7 million related to certain CDMO long-lived assets. See Note 4, "Long-lived asset impairment and restructuring charges" for more details regarding the impairment charge.
As of September 30, 2023, construction-in-progress primarily included costs incurred to advance the Company's MCM Product capabilities. As of December 31, 2022, construction-in-progress primarily included costs incurred due to construction to advance the Company's CDMO capabilities.
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Property, plant and equipment, net is stated at cost, less accumulated depreciation and amortization. During the year ended December 31, 2022, the Company recorded accelerated depreciation of $12.7 million reflecting a shortening of the useful life of certain property, plant and equipment which were to be used in the manufacturing process to fulfill the manufacturing services agreement (the "Janssen Agreement") with Janssen Pharmaceuticals, Inc. ("Janssen"). For additional information related to the termination of the Janssen Agreement, refer to Note 13, "Revenue recognition".
7.    Intangible assets and goodwill
The Company's finite-lived intangible assets consist of products acquired via business combinations or asset acquisitions. The following table summarizes the Company's finite-lived intangible assets:
Weighted Average Useful Life in Years September 30, 2023 December 31, 2022
Gross Carrying Amount Accumulated Amortization
Net Carrying Amount (1)
 Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Products (2)
 13.5 $ 855.4  $ 272.6  $ 582.8  $ 982.1  $ 253.3  $ 728.8 
Customer relationships 0.0 28.6  28.6  —  28.6  28.6  — 
CDMO 0.0 5.5  5.5  —  5.5  5.5  — 
Total intangible assets $ 889.5  $ 306.7  $ 582.8  $ 1,016.2  $ 287.4  $ 728.8 
(1) During the nine months ended September 30, 2023, the Company sold $102.9 million of intangible assets, net as part of the sale of its travel health business to Bavarian Nordic. See Note 3, "Divestiture" for more information on the sale of the travel health business.
(2) During the three months ended September 30, 2023, the Company recorded a $6.3 million intangible asset addition related to the contingent consideration payment to Ridgeback for the award of a 10-year contract by the Biomedical Advanced Research and Development Authority for advanced development, manufacturing scale-up, and procurement of EbangaTM treatment for Ebola. The related intangible asset was acquired through an asset acquisition that was completed in 2022.
Amortization expense associated with the Company's intangible assets was recorded as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Amortization expense $ 16.3  $ 14.0  $ 49.4  $ 42.0 
The table below summarizes the changes in the carrying amount of goodwill by reportable segment:
Products (1)
Services (2)
 Total
Balance at December 31, 2022 $ 218.2  $ —  $ 218.2 
Goodwill impairment (218.2) —  (218.2)
Balance at September 30, 2023 $ —  $ —  $ — 
(1) Amounts for the Company's Products segment include gross carrying values of $259.9 million as of September 30, 2023 and December 31, 2022 and accumulated impairment losses of $259.9 million.
(2) Amounts for the Company's Services segment include gross carrying values of $6.7 million as of September 30, 2023 and December 31, 2022, and accumulated impairment losses of $6.7 million.
The Company performs its goodwill impairment evaluation annually, during the fourth quarter, or sooner if triggering events are identified. During the three months ended September 30, 2023, the Company observed continued market volatility including significant declines in its market capitalization and revised its financial outlook during the third quarter of 2023, which was identified as a triggering event. As a result of the quantitative assessments performed in connection with the preparation of the financial statements as of and for the quarter ended September 30, 2023, the Company recorded a $218.2 million non-cash goodwill impairment charge for the MCM reporting unit within the Products segment, which is included in "Goodwill impairment" on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2023. The MCM reporting unit and Products segment had no remaining goodwill as of September 30, 2023.
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The goodwill impairment charge resulted from a reduction in the estimated fair value of the MCM reporting unit due to changes in the risk profile of the Company as well as revisions to the long-term operating plan that reflected lower expectations for growth and profitability than previous expectations. The Company used a quantitative assessment, utilizing an income-based (discounted cash flows) approach, Level 3 non-recurring fair value measurement, for its goodwill impairment testing.
8.    Fair value measurements
The table below presents information about the Company's assets and liabilities that are regularly measured and carried at fair value and indicates the level within the fair value hierarchy of the valuation techniques the Company utilized to determine fair value:
September 30, 2023 December 31, 2022 (As Restated)
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Assets:
Money market accounts $ 37.2  $ 37.2  $ —  $ —  $ 320.8  $ 320.8  $ —  $ — 
Time deposits —  —  —  —  170.7  —  170.7  — 
Derivative instruments —  —  —  —  8.5  —  8.5  — 
Total $ 37.2  $ 37.2  $ —  $ —  $ 500.0  $ 320.8  $ 179.2  $ — 
Liabilities:
Contingent consideration $ 5.4  $ —  $ —  $ 5.4  $ 8.0  $ —  $ —  $ 8.0 
Total $ 5.4  $ —  $ —  $ 5.4  $ 8.0  $ —  $ —  $ 8.0 
Contingent consideration
Contingent consideration payments in an asset acquisition not required to be accounted for as derivatives are recognized when the contingency is resolved, and the consideration is paid or becomes payable. Contingent consideration liabilities associated with business combinations are measured at fair value. These liabilities represent an obligation of the Company to transfer additional assets to the selling shareholders and owners if future events occur or conditions are met. These liabilities associated with business combinations are measured at fair value at inception and at each subsequent reporting date. The changes in the fair value are primarily due to the expected amount and timing of future net sales, which are inputs that have no observable market. Any changes in fair value for the contingent consideration liabilities related to the Company’s products are classified on the Company's Condensed Consolidated Statement of Operations as "Cost of product sales."
The table below is a reconciliation of the beginning and ending balance of the Company's Level 3 contingent consideration liability:
Contingent Consideration
Balance at December 31, 2022 (As Restated) $ 8.0 
Change in fair value 0.3 
Settlements (0.7)
Balance at March 31, 2023 $ 7.6 
Change in fair value 0.4 
Settlements (0.6)
Balance at June 30, 2023 $ 7.4 
Change in fair value (1.1)
Settlements (0.9)
Balance at September 30, 2023 $ 5.4 
As of September 30, 2023 and December 31, 2022, the current portion of the contingent consideration liability was $2.1 million and $3.4 million, respectively, and was included in "Other current liabilities" on the Condensed Consolidated Balance Sheets. The non-current portion of the contingent consideration liability is included in "Other liabilities" on the Condensed Consolidated Balance Sheets.
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The recurring Level 3 fair value measurement for the Company's contingent consideration liability used the following significant unobservable inputs:
Contingent Consideration Liability
Fair Value as of September 30, 2023
 Valuation Technique Unobservable Input Range
Royalty based $5.4 million Discounted cash flow Discount rate
10.4%
Probability of payment
0% - 75%
Projected year of payment 2023 - 2028
Derivative instruments
Refer to Note 9, "Derivative instruments and hedging activities" for more information about the Company's derivative instruments.
Non-variable rate debt
As of September 30, 2023 and December 31, 2022, the fair value of the Company's 3.875% Senior Unsecured Notes due 2028 (the "2028 Notes") was $190.1 million and $225.1 million, respectively. The fair value was determined through market sources, which are Level 2 inputs and directly observable. The carrying amounts of the Company’s other long-term variable interest rate debt arrangements approximate their fair values (see Note 10, "Debt").
9.    Derivative instruments and hedging activities
Risk management objective of using derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its assets and liabilities and the use of derivative financial instruments. From time to time, the Company enters into interest rate swap transactions to manage exposures that arise from payments of variable interest rate debt associated with the Company's senior secured credit agreements. The objective and strategy with respect to these interest rate swaps is to protect the Company against adverse fluctuations in interest rates.
During the second quarter of 2023, the Company terminated its designated interest rate swap transactions with a total notional value of $350.0 million. Hedge accounting was also discontinued at that time. As of September 30, 2023, the remaining accumulated other comprehensive income associated with the terminated interest rate swaps, before tax, was $0.5 million and will be amortized to earnings over the remaining term of the interest rate swaps prior to termination.
The table below presents the fair value of the Company’s derivative financial instruments designated as hedges as well as their classification on the Condensed Consolidated Balance Sheets:
 
 Fair Value of Asset Derivatives
Classification September 30, 2023 December 31, 2022
Interest Rate Swaps Other Current Assets $ —  $ 8.5 
The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. We incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were not significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate swaps fall into Level 2 in the fair value hierarchy.
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The following table summarizes the amount of gains or losses reclassified from "Accumulated other comprehensive income (loss), net" into "Interest expense" on the Condensed Consolidated Statement of Operations during the three and nine months ended September 30, 2023 and 2022:
Classification Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Interest rate swaps gain (loss) Interest expense $ 3.1  $ 0.4  $ 8.4  $ (1.9)
10.    Debt
The table below presents the components of the Company’s debt:
September 30, 2023 December 31, 2022
Senior secured credit agreement - Term loan due 2025 $ 202.1  $ 362.8 
Senior secured credit agreement - Revolver loan due 2025 211.2  598.0 
3.875% Senior Unsecured Notes due 2028
 450.0  450.0 
Other 3.0  3.0 
Total debt $ 866.3  $ 1,413.8 
Less: Unamortized debt issuance costs (1)
 (4.5) (8.0)
Less: Current portion of long-term debt, net (413.6) (957.3)
Non-current portion of debt, net $ 448.2  $ 448.5 
(1) As of September 30, 2023, excludes the unamortized debt issuance costs related to the revolver loan which are included within "Other current assets" on the accompanying Condensed Consolidated Balance Sheet.
During the second quarter of 2023, the Company reclassified the debt issuance costs associated with the revolver loan to "Other current assets." Prior to the second quarter of 2023, the debt issuance costs associated with the revolver loan were classified as a direct offset to the carrying value of the debt within "Other current liabilities." As of September 30, 2023 and December 31, 2022, the Company had $9.4 million and $1.3 million of debt issuance costs associated with the revolver loan, respectively.
3.875% Senior Unsecured Notes due 2028
On August 7, 2020, the Company completed its offering of $450.0 million aggregate principal amount of 3.875% 2028 Notes. Interest on the 2028 Notes is payable on February 15th and August 15th of each year until maturity, beginning on February 15, 2021. The 2028 Notes will mature on August 15, 2028.
As of August 15, 2023, the Company may redeem the 2028 Notes, in whole or in part, at the redemption prices set forth in the related indenture, plus accrued and unpaid interest. As of August 15, 2023, the Company may redeem all or a portion of the 2028 Notes at a redemption price equal to 100% of the principal amount of the 2028 Notes plus a “make-whole” premium and accrued and unpaid interest as set forth in the related indenture. Upon the occurrence of a change of control, the Company must offer to repurchase the 2028 Notes at a purchase price of 101% of the principal amount of such 2028 Notes plus accrued and unpaid interest.
Negative covenants in the indenture governing the 2028 Notes, among other things, limit the ability of the Company to incur indebtedness and liens, dispose of assets, make investments, enter into certain merger or consolidation transactions and make restricted payments.
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Senior Secured Credit Facilities
On May 15, 2023, the Company entered into the Credit Agreement Amendment. The Credit Agreement Amendment amended the Existing Credit Agreement to, among other things, (a) extend the maturity date of the Senior Secured Credit Facilities from October 13, 2023 to May 15, 2025, (b) reduce the available commitments under the Revolving Credit Facility from $600.0 million to $300.0 million, (c) remove the Company's ability to incur incremental loans and (d) amend certain mandatory prepayment triggers, affirmative covenants, negative covenants and events of default thereunder. In connection with the Credit Agreement Amendment, the Company used the approximately $270.0 million of proceeds from the sale of its travel health business to Bavarian Nordic, which closed on May 15, 2023, together with approximately $217.2 million of cash on hand, to repay approximately $144.4 million in outstanding principal amount of loans under the Term Loan Facility and $342.8 million outstanding principal amount of loans under the Revolving Credit Facility. The Credit Agreement Amendment also requires that the Company make quarterly principal payments on the Term Loan Facility of approximately $3.9 million, which commenced on June 30, 2023 and will extend through March 31, 2025.
The Credit Agreement Amendment also (w) amended the consolidated debt service coverage ratio financial covenant to require the minimum level to be 2.25 to 1.00 for the fiscal quarters ending March 31, 2024, June 30, 2024, September 30, 2024 and December 31, 2024, and then 2.50 to 1.00 for each fiscal quarter ending thereafter, (x) amended the consolidated leverage ratio to require the maximum level to be 4.50 to 1.00 for the fiscal quarter ending March 31, 2024 and each fiscal quarter ending thereafter, (y) added minimum Consolidated EBITDA requirements and maximum capital expenditure requirements for each of the months ending April 30, 2023 through February 29, 2024 and a minimum liquidity requirement as of the end of each calendar month and (z) requires the Company to increase its liquidity by April 30, 2024 by raising at least $75.0 million of equity or unsecured indebtedness.
In addition, the Credit Agreement Amendment replaced the interest rate benchmark such that borrowings under the Revolving Credit Facility and the outstanding principal amount of the Term Loan Facility shall bear interest at a rate per annum equal to (a) a rate based on SOFR, EURIBOR or CDOR plus a margin of 6.00% until March 31, 2024 and thereafter, a margin ranging from 2.75% to 4.00% depending on the Company’s consolidated leverage ratio, or (b) a base rate (which is the highest of the prime rate, the federal funds rate plus 0.50%, and a SOFR rate for an interest period of one month plus 1%) plus a margin of 5.00% until March 31, 2024 and thereafter, a margin ranging from 1.75% to 3.00% depending on the Company’s consolidated leverage ratio. In addition, the commitment fee the Company is required to pay in respect of the annual daily unused commitments under the Revolving Credit Facility shall be 0.15% to 0.40% per annum, depending on the Company’s consolidated leverage ratio.
Under the Credit Agreement Amendment, the Company and the other guarantors also agreed to provide a lien over certain assets as additional collateral for the benefit of the lenders, including owned real property, equity interests of foreign subsidiaries and certain deposit accounts.
23

11.    Stock-based compensation and stockholders' equity
Stock-based compensation
During the nine months ended September 30, 2023, the Company granted stock options to purchase 0.8 million shares of common stock, 1.6 million restricted stock units and 0.5 million performance stock units under the Emergent BioSolutions Inc. Amended and Restated Stock Incentive Plan. Performance stock units are presented at the target payout percentage of 100% of target shares granted and the maximum potential payout percentage is up to 200% of target shares granted. Typically, the stock options and restricted stock unit grants vest over three equal annual installments beginning on the day prior to the anniversary of the grant date. The performance stock units settle in stock at the end of the three-year performance period based on the Company's results compared to the performance criteria. During the nine months ended September 30, 2023, 0.9 million of stock options and 0.7 million shares of restricted stock units were forfeited prior to the completion of the applicable vesting requirements or expiration. Additionally, 0.3 million performance stock units were forfeited during the nine months ended September 30, 2023, as the award targets or vesting requirements were not achieved.
Stock-based compensation expense, net of forfeitures was recorded in the following financial statement line items:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Cost of product sales $ 1.0  $ 1.8  $ 3.6  $ 5.4 
Cost of CDMO 0.2  0.4  0.8  1.4 
R&D 0.6  1.3  1.7  3.9 
Selling, general and administrative 2.2  7.7  13.0  22.7 
Total stock-based compensation expense $ 4.0  $ 11.2  $ 19.1  $ 33.4 
At-the-Market Equity Offering Facility
We may, from time to time, sell up to $150.0 million aggregate gross sales price of shares of our common stock through Evercore Group L.L.C. and RBC Capital Markets, LLC, as sales agents, under an “at-the-market” equity offering program (the “ATM Program”) that we entered into on May 18, 2023. There were no sales of our common stock under the ATM Program during the three months ended September 30, 2023. Between the entry into the ATM Program and September 30, 2023, we sold 1.1 million shares of our common stock under the ATM Program for gross proceeds of $9.1 million, representing an average share price of $8.22 per share. As of September 30, 2023, $140.9 million aggregate gross sales price of shares of our common stock remains available for issuance under the ATM Program. We intend to use proceeds obtained from the sale of shares under the ATM Program for general corporate purposes.
2023 Inducement Plan
On September 28, 2023, the Company's Board of Directors adopted and approved the Emergent BioSolutions, Inc. Inducement Plan (the "Inducement Plan"), pursuant to which the Company may from time to time make equity grants to individuals not previously an employee or director of the Company or any of its subsidiaries (or following a bona fide period of interruption of employment) as a material inducement to their employment by the Company. The Inducement Plan was adopted by the board of directors without stockholder approval pursuant to New York Stock Exchange Listing Rule 303A.08. The board of directors reserved 5,000,000 shares of the Company's common stock for issuance under the Inducement Plan. The terms and conditions of the Inducement Plan are substantially similar to the Company's stockholder-approved Emergent BioSolutions Inc. Amended and Restated Stock Incentive Plan. As of September 30, 2023, no shares had been issued under the Inducement Plan.
2021 Share Repurchase Program
On November 11, 2021, the Company announced that its board of directors authorized a stock repurchase program of up to an aggregate of $250.0 million of common stock (the "2021 Share Repurchase Program"), of which $187.9 million was utilized to purchase approximately 4.4 million shares. The 2021 Share Repurchase Program expired on November 11, 2022. During the three months ended September 30, 2022, there were no shares repurchased. During the nine months ended September 30, 2022, the Company utilized $75.5 million to purchase approximately 1.8 million shares. The 2021 Share Repurchase Program did not obligate the Company to acquire any specific number of shares. Repurchased shares are available for use in connection with the Company's stock plans and for other corporate purposes.
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Accumulated other comprehensive income (loss), net of tax
The following table includes changes in accumulated other comprehensive income (loss), net of tax by component:
Defined Benefit Pension Plan Derivative Instruments Foreign Currency
 Translation Adjustments		 Total
Balance at December 31, 2022
 $ 3.5  $ 6.2  $ (6.6) $ 3.1 
Other comprehensive income (loss) before reclassifications —  (4.4) (0.1) (4.5)
Amounts reclassified from accumulated other comprehensive income (loss) —  2.4  —  2.4 
Net current period other comprehensive income (loss) —  (2.0) (0.1) (2.1)
Balance at March 31, 2023 $ 3.5  $ 4.2  $ (6.7) $ 1.0 
Other comprehensive income (loss) before reclassifications —  1.2  2.6  3.8 
Amounts reclassified from accumulated other comprehensive income (loss) (3.5) (2.9) —  (6.4)
Net current period other comprehensive income (loss) (3.5) (1.7) 2.6  (2.6)
Balance at June 30, 2023 $ —  $ 2.5  $ (4.1) $ (1.6)
Other comprehensive income (loss) before reclassifications —  0.9  1.2  2.1 
Amounts reclassified from accumulated other comprehensive income (loss) —  (3.1) —  (3.1)
Net current period other comprehensive income (loss) —  (2.2) 1.2  (1.0)
Balance at September 30, 2023 $ —  $ 0.3  $ (2.9) $ (2.6)
Balance at December 31, 2021
 $ (4.0) $ (4.5) $ (7.6) $ (16.1)
Other comprehensive income (loss) before reclassifications —  4.9  0.5  5.4 
Amounts reclassified from accumulated other comprehensive income (loss) —  1.4  —  1.4 
Net current period other comprehensive income (loss) —  6.3  0.5  6.8 
Balance at March 31, 2022 $ (4.0) $ 1.8  $ (7.1) $ (9.3)
Other comprehensive income (loss) before reclassifications —  1.9  0.4  2.3 
Amounts reclassified from accumulated other comprehensive income (loss) —  0.9  —  0.9 
Net current period other comprehensive income (loss) —  2.8  0.4  3.2 
Balance at June 30, 2022 $ (4.0) $ 4.6  $ (6.7) $ (6.1)
Other comprehensive income (loss) before reclassifications —  2.6  (1.3) 1.3 
Amounts reclassified from accumulated other comprehensive income (loss) —  (0.4) —  (0.4)
Net current period other comprehensive income (loss) —  2.2  (1.3) 0.9 
Balance at September 30, 2022 $ (4.0) $ 6.8  $ (8.0) $ (5.2)
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The tables below present the tax effects related to each component of other comprehensive income (loss):
Three Months Ended September 30,
2023 2022
Pretax Tax Expense Net of tax Pretax Tax Expense Net of tax
Defined benefit pension plan $ —  $ —  $ —  $ —  $ —  $ — 
Derivative instruments (3.1) 0.9  (2.2) 3.0  (0.8) 2.2 
Foreign currency translation adjustments 0.9  0.3  1.2  0.1  (1.4) (1.3)
Total adjustments $ (2.2) $ 1.2  $ (1.0) $ 3.1  $ (2.2) $ 0.9 
Nine Months Ended September 30,
2023 2022
Pretax Tax Expense Net of tax Pretax Tax Expense Net of tax
Defined benefit pension plan $ (4.1) $ 0.6  $ (3.5) $ —  $ —  $ — 
Derivative instruments (8.0) 2.1  (5.9) 15.4  (4.1) 11.3 
Foreign currency translation adjustments 2.9  0.8  3.7  2.1  (2.5) (0.4)
Total adjustments $ (9.2) $ 3.5  $ (5.7) $ 17.5  $ (6.6) $ 10.9 
12.    Loss per common share
Basic loss per common share is calculated using the treasury method by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share adjusts basic loss per common share for the effects of potentially dilutive common shares and is calculated using the treasury stock method. Potentially dilutive common shares include the dilutive effect of shares issuable under our equity compensation plans, including stock options, restricted stock units and performance stock units. Diluted loss per share excludes anti-dilutive securities, which represent the number of potential common shares related to shares issuable under our equity compensation plan that were excluded from diluted loss per common share because their effect would have been antidilutive.
The following table presents the calculation of basic and diluted loss per common share:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(As Restated) (As Restated)
Numerator:  
Net loss $ (263.4) $ (87.1) $ (711.0) $ (144.6)
Denominator:
Weighted-average number of shares outstanding-basic 51.8  49.9  50.9  50.2 
Weighted-average number of shares outstanding-diluted 51.8  49.9  50.9  50.2 
Loss per common share - basic $ (5.08) $ (1.75) $ (13.97) $ (2.88)
Loss per common share - diluted $ (5.08) $ (1.75) $ (13.97) $ (2.88)
Anti-dilutive securities 4.0  3.3  3.6  2.6 
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13. Revenue recognition
We generate the majority of our revenues through product sales to our customers. We also generate revenues through CDMO services and suite reservations for and to third parties and contracts and grants revenue. The Company recognizes revenue when the Company's customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services by analyzing the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Beginning in the third quarter of 2023, the Company launched NARCAN® OTC, which was approved by the FDA as an over-the-counter emergency treatment of opioid overdose, broadening our customer base and sales channels to retail pharmacies and digital commerce websites. The Company's Nasal Naloxone Products are now sold commercially over-the-counter at retail pharmacies and digital commerce websites as well as through physician-directed or standing order prescriptions at retail pharmacies, health departments, local law enforcement agencies, community-based organizations, substance abuse centers and other federal agencies.
The Company's NARCAN® OTC customer contracts are fixed price contracts. The Company invoices and records revenue when the pharmacies and wholesalers receive product from the third-party logistics warehouse used by the Company, which is the point at which control is transferred to the customer. Revenues for NARCAN® OTC are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Estimates of variable consideration includes allowance for returns, specialty distributor fees, wholesaler fees and prompt payment discounts. Revenues from NARCAN® OTC are recognized to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with such variable consideration is subsequently resolved. The Company considers several factors in the estimation process for the allowance for returns of NARCAN® OTC, including inventory levels within the distribution channel, product shelf life and historical return activity, including activity for product sold for which the return period has passed, as well as other relevant factors. Because returned product cannot be resold, there is no corresponding asset for product returns.
The Company's revenues disaggregated by operating segment and major sources for the three and nine months ended September 30, 2023 and 2022 were as follows:
Three Months Ended September 30, 2023 Three Months Ended September 30, 2022
USG Non-USG  Total USG Non-USG  Total
Product sales, net $ 103.0  $ 146.8  $ 249.8  $ 33.4  $ 152.8  $ 186.2 
CDMO:
Services —  13.2  13.2  —  36.1  36.1 
Leases —  1.0  1.0  —  0.2  0.2 
Total CDMO $ —  $ 14.2  $ 14.2  $ —  $ 36.3  $ 36.3 
Contracts and grants 5.1  1.4  6.5  16.4  1.0  17.4 
Total revenues $ 108.1  $ 162.4  $ 270.5  $ 49.8  $ 190.1  $ 239.9 
Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022
USG Non-USG  Total USG Non-USG  Total
Product sales, net $ 279.6  $ 415.8  $ 695.4  $ 255.0  $ 405.5  $ 660.5 
CDMO:
Services —  52.2  52.2  —  87.8  87.8 
Leases —  5.5  5.5  —  4.7  4.7 
Total CDMO $ —  $ 57.7  $ 57.7  $ —  $ 92.5  $ 92.5 
Contracts and grants 14.6  5.0  19.6  31.7  2.6  34.3 
Total revenues $ 294.2  $ 478.5  $ 772.7  $ 286.7  $ 500.6  $ 787.3 
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CDMO operating leases
Certain multi-year CDMO service arrangements with commercial customers include operating leases whereby the customer has the right to direct the use of and obtain substantially all of the economic benefits of specific manufacturing suites operated by the Company. The associated revenue is recognized on a straight-line basis over the term of the lease. The weighted average remaining term on the Company's operating lease components approximates 5.3 years. The Company utilizes a cost-plus model to determine the stand-alone selling price of the lease component to allocate contract consideration between the lease and non-lease components. The Company estimates future operating lease revenues to be $0.2 million in the remainder of 2023, $0.9 million in 2024, $0.9 million in 2025, $0.9 million in 2026, $0.9 million in 2027 and $0.9 million in years beyond 2027.
Transaction price allocated to remaining performance obligations
As of September 30, 2023, the Company has future contract value on unsatisfied performance obligations of approximately $408.6 million associated with all arrangements entered into by the Company. The Company expects to recognize $400.3 million of unsatisfied performance obligations within the next 24 months. The amount and timing of revenue recognition for unsatisfied performance obligations can change. The future revenues associated with unsatisfied performance obligations exclude the value of unexercised option periods in the Company’s revenue arrangements. Often the timing of manufacturing activities changes based on customer needs and resource availability. Government funding appropriations can impact the timing of product deliveries. The success of the Company's development activities that receive development funding support from the USG under development contracts can also impact the timing of revenue recognition.
Contract assets
The Company considers accounts receivable and deferred costs associated with revenue generating contracts, which are not included in inventory or property, plant and equipment and that the Company does not currently have a contractual right to bill, to be contract assets. As of September 30, 2023 and December 31, 2022, the Company had $38.4 million and $34.8 million, respectively, of contract assets recorded within "Accounts receivable, net" on the Condensed Consolidated Balance Sheets.
Contract liabilities
When performance obligations are not transferred to a customer at the end of a reporting period, cash received associated with amounts allocated to those performance obligations is reflected as contract liabilities on the Condensed Consolidated Balance Sheets and is deferred until control of these performance obligations is transferred to the customer. The following table presents the roll forward of the contract liability balances:
Contract Liabilities
Balance at December 31, 2022 $ 31.7 
Balance at September 30, 2023 $ 27.9 
Revenue recognized in the period from amounts included in contract liability at the beginning of the period: $ (7.3)
As of September 30, 2023 and December 31, 2022, the current portion of contract liabilities was $22.9 million and $26.4 million, respectively, and was included in "Other current liabilities" on the Condensed Consolidated Balance Sheets.
Accounts receivable and allowance for expected credit losses
Accounts receivable, including unbilled accounts receivable contract assets, consist of the following:
September 30, 2023 December 31, 2022
(As Restated)
Accounts receivable:
Billed $ 156.6  $ 102.7 
Unbilled 61.0  57.2 
Allowance for expected credit losses (1.1) (0.7)
Accounts receivable, net $ 216.5  $ 159.2 
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We maintain an allowance for expected credit losses, which represents the estimated aggregate amount of credit risk arising from the inability or unwillingness of specific customers to pay our fees or disputes that may affect our ability to fully collect our billed accounts receivable. We estimate the current-period provision for expected credit losses on a specific identification basis and we consider factors such as the age of the receivables balance, knowledge of the specific customers' circumstances and historical collection experience for similar customers. Accounts receivable, net of the allowance for expected credit losses, represents the amount we expect to collect. Our actual experience may vary from our estimates. At each reporting date, we adjust the allowance for expected credit losses to reflect our current estimate.
2022 Termination of manufacturing services agreement with Janssen Pharmaceuticals, Inc.
On July 2, 2020, the Company, through its wholly owned subsidiary, Emergent Manufacturing Operations Baltimore, LLC, entered into the Janssen Agreement with Janssen, one of the Janssen Pharmaceutical Companies of Johnson & Johnson, for large-scale drug substance manufacturing of Johnson & Johnson’s investigational SARS-CoV-2 vaccine, Ad26.COV2-S, recombinant based on the AdVac technology (the “Product”).
On June 6, 2022, the Company provided to Janssen a notice (the “Notice”) of material breach of the Janssen Agreement for, among other things, failure by Janssen (i) to provide the Company the requisite forecasts of the required quantity of Product to be purchased by Janssen under the Janssen Agreement and (ii) to confirm Janssen’s intent to not purchase the requisite minimum quantity of the Product pursuant to the Janssen Agreement and instead, wind-down the Janssen Agreement ahead of fulfilling these minimum requirements. Later on June 6, 2022, the Company received from Janssen a purported written notice of termination (the “Janssen Notice”) of the Janssen Agreement for asserted material breaches of the Janssen Agreement by the Company, including alleged failure by the Company to perform its obligations in compliance with current good manufacturing practices ("cGMP") or other applicable laws and regulations and alleged failure by the Company to supply Janssen with the Product. Janssen alleged that the Company’s breaches were not curable and that, therefore, termination of the Janssen Agreement would be effective as of July 6, 2022. The Company disputes Janssen's assertions and allegations, including Janssen's ability to effect termination pursuant to the Janssen Notice. The Company and Janssen disagree on the monetary amounts that are due to the Company as a result of termination by any means. The Company believes the amounts due to the Company include, but are not limited to, compensation for services provided, reimbursement for raw materials purchased and non-cancelable orders, and fees for early termination. Janssen has alleged that no additional amount is due to the Company and that the Company should pay Janssen an unspecified amount as a result of the Company's alleged failure to perform under the Janssen Agreement. The Company has not recorded any contingent liabilities related to Janssen's allegations as the Company believes they are without merit and intends to vigorously defend the Company's position during the dispute resolution process through arbitration.
During the three months ended September 30, 2023, there were no impacts on previously recognized revenue or depreciation related to the conclusion of the Janssen Agreement. As of September 30, 2023, the Company has no billed or unbilled net accounts receivable related to the Janssen Agreement.
Beginning in the fourth quarter of 2022, because the arbitration process is expected to extend longer than one year, the Company reclassified amounts related to the Janssen Agreement from "Inventories, net" and from "Prepaid expenses and other current assets" to "Other assets", resulting in $152.7 million in long-term assets related to the Janssen Agreement on the Condensed Consolidated Balance Sheet as of December 31, 2022. The long-term asset balance within "Other Assets" related to the Janssen Agreement as of September 30, 2023 was $153.8 million. These assets include termination penalties, certain inventory related items and raw materials inventory representing materials purchased for the Janssen Agreement which Janssen has not reimbursed. The Company evaluated the net realizable value of the inventory as of September 30, 2023, concluding that because the Janssen Agreement specifies the Company is entitled to, among other things, reimbursement of raw materials and non-cancelable orders in the event of a contract termination for any reason, the Company is entitled to payment from Janssen for these raw materials. Additionally, the Company has $5.0 million of non-cancelable orders as of September 30, 2023 which have not been received and Janssen has not reimbursed.
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14.    Leases
The Company is the lessee for operating leases for offices, R&D facilities and manufacturing facilities. The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use assets and liabilities. For a discussion of lessor activities, see Note 13, "Revenue recognition."
The components of lease expense were as follows: 
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Operating lease cost:
Amortization of right-of-use assets $ 1.1  $ 1.4  $ 3.1  $ 4.2 
Interest on lease liabilities 0.2  0.3  0.6  0.8 
Total operating lease cost $ 1.3  $ 1.7  $ 3.7  $ 5.0 
Operating lease costs are reflected as components of cost of product sales, cost of contract development and manufacturing, R&D expense and selling, general and administrative expense.
Supplemental balance sheet information related to lessee activities is as follows:
Leases Classification September 30, 2023 December 31, 2022
Operating lease right-of-use assets Other assets $ 17.1  $ 19.4 
Operating lease liabilities, current portion Other current liabilities $ 3.5  $ 5.8 
Operating lease liabilities Other liabilities 14.6  14.8 
Total operating lease liabilities $ 18.1  $ 20.6 
Operating leases:
Weighted average remaining lease term (years) 6.3 5.9
Weighted average discount rate 5.2  % 4.1  %
15.    Income taxes
The estimated effective annual tax rate as of September 30, 2023 and 2022 for the years ended December 31, 2023 and 2022, excluding the impact of discrete adjustments, was (5)% and 4%, respectively. The decrease in the estimated effective annual tax rate is primarily due to valuation allowance and goodwill impairment charges. The Company recorded a discrete tax expense (benefit) of $1.0 million and $1.0 million for the three and nine months ended September 30, 2023, respectively, and $(9.0) million and $(7.3) million for the three and nine months ended September 30, 2022, respectively. The discrete tax expense in 2023 was due to return-to-provision adjustments and share-based compensation activity which was entirely offset by a valuation allowance charge. The discrete benefit in 2022 was primarily due to return-to-provision adjustments and the benefit of the release of an indemnified uncertain tax position offset by share-based compensation activity.
The Company establishes valuation allowances for deferred income tax assets in accordance with U.S. GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, the Company considers the scheduled reversal of deferred tax liabilities and assets, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment.
In 2022, the Company determined that it was more likely than not that certain deferred tax assets would not be realized due to reductions in estimates of future profitability and disclosure related to substantial doubt about the Company's ability to continue as a going concern. Accordingly, the Company recorded an additional valuation allowance charge of $163.1 million in calculating the estimated annual tax rate for the year ended December 31, 2023.
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16.    Litigation
Securities and shareholder litigation
With respect to the specific legal proceedings and claims described below, unless otherwise noted, the amount or range of possible losses is not reasonably estimable. There can be no assurance that the settlement, resolution, or other outcome of one or more matters, including the matters set forth below, during any subsequent reporting period will not have a material adverse effect on the Company's results of operations or cash flows for that period or on the Company's financial condition.
On April 20, 2021, May 14, 2021, and June 2, 2021, putative class action lawsuits were filed against the Company and certain of its current and former senior officers in the United States District Court for the District of Maryland on behalf of purchasers of the Company’s common stock, seeking to pursue remedies under the Securities Exchange Act of 1934. These complaints were filed by Palm Tran, Inc. – Amalgamated Transit Union Local 1577 Pension Plan; Alan I. Roth; and Stephen M. Weiss, respectively. The complaints allege, among other things, that the defendants made false and misleading statements about the Company's manufacturing capabilities with respect to COVID-19 vaccine bulk drug substance (referred to herein as "CDMO Manufacturing Capabilities"). These cases were consolidated on December 23, 2021, under the caption In re Emergent BioSolutions Inc. Securities Litigation, No. 8:21-cv-00955-PWG (the "Federal Securities Class Action"). The lead plaintiffs in the consolidated matter (the "Lead Plaintiffs") are Nova Scotia Health Employees’ Pension Plan and The City of Fort Lauderdale Police & Firefighters’ Retirement System. The defendants filed a motion to dismiss on May 19, 2022 and the Lead Plaintiffs filed an opposition to that motion on July 19, 2022. A hearing on the motion to dismiss was conducted on April 19, 2023 and an order was entered on September 1, 2023, granting in part and denying in part the motion to dismiss. The defendant's answer to the complaint was filed on October 30, 2023. The defendants believe that the allegations in the complaints are without merit and intend to defend the matters vigorously. Given the uncertainty of litigation, the preliminary stage of the cases, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot reasonably estimate the possible loss or range of loss, if any, that may result from the consolidated action.
On June 29, 2021, Lincolnshire Police Pension Fund (“Lincolnshire”), and on August 16, 2021, Pooja Sayal, filed putative shareholder derivative lawsuits in the United States District Court for the District of Maryland on behalf of the Company against certain of the Company's current and former officers and directors for breach of fiduciary duties, waste of corporate assets, and unjust enrichment, each allegation related to the CDMO Manufacturing Capabilities. In addition to monetary damages, the complaints seek the implementation of multiple corporate governance and internal policy changes. On November 16, 2021, the cases were consolidated under the caption In re Emergent BioSolutions Inc. Stockholder Derivative Litigation, Master Case No. 8:21-cv-01595-PWG. On January 3, 2022, the Lincolnshire complaint was designated as the operative complaint in the consolidated action. On April 13, 2022 the Court approved the parties' joint stipulation to and stay of the proceedings and discovery until the close of fact discovery in the Federal Securities Class Action. The defendants believe that the allegations in the complaints are without merit and intend to defend the matter vigorously.
On September 15, 2021, September 16, 2021 and November 12, 2021, putative shareholder derivative lawsuits were filed by Chang Kyum Kim, Mark Nevins and Employees Retirement System of the State of Rhode Island, North Collier Fire Control and Rescue District Firefighters Pension Plan, and Pembroke Pines Firefighters & Police Officers Pension Fund, respectively, in the Court of Chancery of the State of Delaware on behalf of the Company against certain of its current and former officers and directors for breach of fiduciary duties, unjust enrichment and insider trading, each allegation related to the CDMO Manufacturing Capabilities. In addition to monetary damages, the complaints seek the implementation of multiple corporate governance and internal policy changes. On February 2, 2022, the cases were consolidated under the caption In re Emergent BioSolutions, Inc. Derivative Litigation, C.A. No. 2021-0974-MTZ with the institutional investors as co-lead plaintiffs. On March 4, 2022, the defendants’ filed a motion to dismiss the complaint. Ruling on this motion is stayed pursuant to a March 29, 2022 order staying all proceedings pending a final, non-appealable judgment in the Federal Securities Class Action.
On December 3, 2021, December 22, 2021 and January 18, 2022, putative shareholder derivative lawsuits were filed by Zachary Elton, Eric White and Jeffrey Reynolds in the Circuit Court for Montgomery County, Maryland on behalf of the Company against certain of its current and former officers and directors for breach of fiduciary duty, unjust enrichment, waste of corporate assets, failing to maintain internal controls, making or causing to be made false and/or misleading statements and material omissions, insider trading and otherwise violating the federal securities laws, each allegation related to the CDMO Manufacturing Capabilities. The complaints seek monetary and punitive damages. On February 22, 2022, the Court entered an order consolidating these actions under case number C-15-21-CV-000496. On March 9, 2022, the parties filed a Joint Stipulation of Stay of Proceedings and Discovery, pursuant to which the parties agreed to stay all proceedings until 30 calendar days after a ruling on the defendants’ motion to dismiss, and on November 2, 2023 the Court approved the parties' joint stipulation to extend the stay of the proceedings and discovery until the close of fact discovery in the Federal Securities Class Action.
31

In addition to the above actions, the Company has received inquiries and subpoenas to produce documents related to these matters from the Department of Justice, the SEC, the Maryland Attorney General’s Office, and the New York Attorney General’s Office. The Company produced or is producing documents as required in response and will continue to cooperate with these government inquiries. The Company also received inquiries and subpoenas from Representative Carolyn Maloney and Representative Jim Clyburn, members of the House Committee on Oversight and Reform and the Select Subcommittee on the Coronavirus Crisis and Senator Murray of the Committee on Health, Education, Labor and Pensions. The Company produced documents and provided testimony and briefings as requested in response to these inquiries.
17.    Segment information
The Company reports segment information based on the internal reporting used by management for making decisions and assessing performance. We manage our business with a focus on two reportable segments. Our Products segment, which includes the Anthrax - MCM products, NARCAN® products, Smallpox - MCM products and Other products, and our Services segment consisting of our CDMO services. The Company evaluates the performance of these reportable segments based on revenue and Adjusted Gross Margin, which is a non-GAAP financial measure. Segment revenue includes external customer sales, but it does not include inter-segment services. The Company defines Adjusted Gross Margin as segment revenue less segment cost of sales reduced for significant restructuring events, inventory step-up provisions and changes in fair value of contingent consideration. The Company does not allocate research and development, selling, general and administrative costs, amortization of intangibles assets, interest and other income (expense) or taxes to operating segments in the management reporting reviewed by the chief operating decision maker ("CODM"). The accounting policies for segment reporting are the same as for the Company as a whole.
The Company manages its assets on a total company basis, not by operating segment, as the Company's operating assets are shared or commingled. Therefore, the Company's CODM does not regularly review any asset information by operating segment and, accordingly, the Company does not report asset information by operating segment.
32

The following table includes segment revenues and a reconciliation of the Company's segment adjusted gross margin to the consolidated statement of operations for each of the Company's reporting segments:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(As Restated) (As Restated)
Revenues:
Products $ 249.8  $ 186.2  $ 695.4  $ 660.5 
Services 14.2  36.3  57.7  92.5 
Total segment revenues 264.0  222.5  753.1  753.0 
Contracts and grants revenues 6.5  17.4  19.6  34.3 
Total revenues $ 270.5  $ 239.9  $ 772.7  $ 787.3 
Less: Cost of sales:
Cost of Products $ 132.5  $ 85.2  $ 368.6  256.8 
Cost of Services 44.3  62.0  151.7  215.8 
Total cost of sales $ 176.8  $ 147.2  $ 520.3  $ 472.6 
Products gross margin $ 117.3  $ 101.0  $ 326.8  $ 403.7 
Services gross margin $ (30.1) $ (25.7) $ (94.0) $ (123.3)
Consolidated gross margin(1)
 $ 87.2  $ 75.3  $ 232.8  $ 280.4 
Adjustments to gross margin:
Products:
Changes in fair value of contingent consideration $ (1.1) $ 0.6  $ (0.4) $ 2.4 
Restructuring costs 5.0  —  7.0  — 
Inventory step-up provision —  —  1.9  — 
Services:
Restructuring costs $ 8.1  $ —  $ 8.1  $ — 
Products adjusted gross margin $ 121.2  $ 101.6  $ 335.3  $ 406.1 
Services adjusted gross margin $ (22.0) $ (25.7) $ (85.9) $ (123.3)
Consolidated adjusted gross margin(2)
 $ 99.2  $ 75.9  $ 249.4  $ 282.8 
Other reconciling items:
Contracts and grants revenue $ 6.5  $ 17.4  $ 19.6  $ 34.3 
Adjustments to gross margin (12.0) (0.6) (16.6) (2.4)
Goodwill impairment (218.2) —  (218.2) — 
Impairment of long-lived assets —  —  (306.7) — 
Research and development (15.3) (42.2) (82.0) (141.3)
Selling, general and administrative (86.0) (81.8) (278.7) (246.1)
Amortization of intangible assets (16.3) (14.0) (49.4) (42.0)
Interest expense (19.7) (8.5) (66.2) (24.5)
Gain on sale of business (0.7) —  74.2  — 
Other, net (3.4) (13.4) (2.1) (18.4)
Loss before income taxes $ (265.9) $ (67.2) $ (676.7) $ (157.6)
(1) Total segment revenues less total cost of sales.
(2) Consolidated gross margin plus adjustments to gross margin.
33

The following table includes depreciation expense for each segment:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(As Restated) (As Restated)
Depreciation:
Products $ 7.4  $ 11.5  $ 22.9  $ 25.6 
Services 3.4  5.5  19.7  34.1 
Other 0.9  3.3 3.5  5.7
Total $ 11.7  $ 20.3  $ 46.1  $ 65.4 
34

18. Adjustments to quarterly financial data
As part of the Company's quarterly review process related to the preparation of its unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023, the Company determined that its net state deferred tax liability was overstated as of December 31, 2022, resulting in an understatement of the income tax benefits reflected on the Company's consolidated statement of operations. This material error was associated with the use of incorrect state tax rates in the calculation of state deferred tax assets and related valuation allowances, which are non-cash items that resulted in an understatement of the Company's income tax benefit. Refer to Amendment No. 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on December 11, 2023 for more information regarding the restatement of the consolidated financial statements for the fiscal year ended December 31, 2022, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Original Form 10-K”). Due to the use of incorrect state tax rates in the calculation of state deferred tax assets and related valuation allowances along with other individually immaterial adjustments affecting the period, the Company understated the income tax provision by $8.1 million and $1.7 million for the three and nine months ended September 30, 2022. As a result, the Company determined to restate its interim financial statements for the three and nine months ended September 30, 2022. In addition to adjustments that impacted the Company’s financial statements for the fiscal year ended December 31, 2022, and interim financial statements as of and for the three and nine months ended September 30, 2022, there were other immaterial adjustments, both individually and in the aggregate, that impacted the Company’s 2023 quarterly filings for the periods ended March 31, 2023 and June 30, 2023.
The tables below present the impact of the financial statement adjustments on the Company's previously reported Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2022, the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2022 and the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2022. The "Previously Reported" amounts in the following tables are amounts derived from the Original Form 10-K or the Quarterly Report on Form 10-Q for the applicable period. The amounts in the columns labeled "Tax Adjustments" represent the effect of adjustments resulting from the correction of the misstatement of the Company’s net state deferred tax liability and the income tax benefits and includes the tax impact of all other individually immaterial non-tax adjustments. The amounts in the columns labeled "Other Adjustments" represent the effect of correcting other unrelated errors that were previously recognized as out-of-period adjustments in previously filed financial statements that were not material, individually or in the aggregate, to those financial statements. The effects of the restatement and immaterial revisions have been corrected in all impacted tables and footnotes throughout these condensed consolidated financial statements. consolidated financial statements.
35

The following tables present the impact of the financial statement adjustments on the Company's previously reported Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2022:
As of
September 30, 2022
Previously Reported Tax Adjustments Other Adjustments As Restated
ASSETS
Current assets:
Cash and cash equivalents $ 240.9  $ —  $ —  $ 240.9 
Restricted cash 0.1  —  —  0.1 
Accounts receivable, net 191.3  —  (2.1) 189.2 
Inventories, net 546.3  —  (18.1) 528.2 
Prepaid expenses and other current assets 139.9  —  —  139.9 
Total current assets 1,118.5  —  (20.2) 1,098.3 
Property, plant and equipment, net 806.7  —  0.1  806.8 
Intangible assets, net 722.7  —  2.2  724.9 
Goodwill 224.9  —  —  224.9 
Other assets 35.7  —  5.1  40.8 
Total assets $ 2,908.5  $ —  $ (12.8) $ 2,895.7 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 103.8  $ —  $ (2.8) $ 101.0 
Accrued expenses 35.9  —  (0.2) 35.7 
Accrued compensation 82.5  —  —  82.5 
Debt, current portion 21.2  —  —  21.2 
Other current liabilities 25.0  (0.7) (0.3) 24.0 
Total current liabilities 268.4  (0.7) (3.3) 264.4 
Debt, net of current portion 1,032.1  —  —  1,032.1 
Deferred tax liability 113.8  0.1  —  113.9 
Other liabilities 44.9  6.5  0.9  52.3 
Total liabilities 1,459.2  5.9  (2.4) 1,462.7 
Stockholders’ equity:
Preferred stock, $0.001 par value; 15.0 shares authorized, no shares issued and outstanding
 —  —  —  — 
Common stock, $0.001 par value; 200.0 shares authorized, 55.5 shares issued; 49.9 shares outstanding
 0.1  —  —  0.1 
Treasury stock, at cost, 5.6 common shares
 (227.7) —  —  (227.7)
Additional paid-in capital 860.1  —  —  860.1 
Accumulated other comprehensive income (loss), net (5.2) —  —  (5.2)
Retained earnings 822.0  (5.9) (10.4) 805.7 
Total stockholders’ equity 1,449.3  (5.9) (10.4) 1,433.0 
Total liabilities and stockholders’ equity $ 2,908.5  $ —  $ (12.8) $ 2,895.7 
36

As of
December 31, 2022
Previously Reported Tax Adjustments Other Adjustments As Restated
ASSETS
Current assets:
Cash and cash equivalents $ 642.6  $ —  $ —  $ 642.6 
Restricted cash —  —  —  — 
Accounts receivable, net 158.4  —  0.8  159.2 
Inventories, net 351.8  —  (1.1) 350.7 
Prepaid expenses and other current assets 57.9  —  —  57.9 
Total current assets 1,210.7  —  (0.3) 1,210.4 
Property, plant and equipment, net 817.6  —  —  817.6 
Intangible assets, net 728.8  —  —  728.8 
Goodwill 218.2  —  —  218.2 
Other assets 191.3  —  —  191.3 
Total assets $ 3,166.6  $ —  $ (0.3) $ 3,166.3 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 103.5  $ —  $ —  $ 103.5 
Accrued expenses 34.9  —  —  34.9 
Accrued compensation 88.3  —  (1.0) 87.3 
Debt, current portion 957.3  —  —  957.3 
Other current liabilities 45.9  (0.3) 0.3  45.9 
Total current liabilities 1,229.9  (0.3) (0.7) 1,228.9 
Debt, net of current portion 448.5  —  —  448.5 
Deferred tax liability 71.8  (12.1) —  59.7 
Other liabilities 33.4  7.1  1.0  41.5 
Total liabilities 1,783.6  (5.3) 0.3  1,778.6 
Stockholders’ equity:
Preferred stock, $0.001 par value; 15.0 shares authorized, no shares issued and outstanding
 —  —  —  — 
Common stock, $0.001 par value; 200.0 shares authorized, 55.7 shares issued; 50.1 shares outstanding
 0.1  —  —  0.1 
Treasury stock, at cost, 5.6 common shares
 (227.7) —  —  (227.7)
Additional paid-in capital 873.5  —  —  873.5 
Accumulated other comprehensive income (loss), net 3.1  —  —  3.1 
Retained earnings 734.0  5.3  (0.6) 738.7 
Total stockholders’ equity 1,383.0  5.3  (0.6) 1,387.7 
Total liabilities and stockholders’ equity $ 3,166.6  $ —  $ (0.3) $ 3,166.3 
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The following tables present the impact of the financial statement adjustments on the Company's previously reported Quarterly Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022:
 
 Three Months Ended
 
 September 30, 2022
Previously Reported Tax Adjustments Other Adjustments As Restated
Revenues:    
Product sales, net $ 186.2  $ — $ —  $ 186.2 
CDMO:
Services 36.2  —  (0.1) 36.1 
Leases 0.2  —  —  0.2 
Total CDMO revenues 36.4  —  (0.1) 36.3 
Contracts and grants 17.4  —  —  17.4 
Total revenues 240.0  —  (0.1) 239.9 
Operating expenses:
Cost of product sales 85.5  —  (0.3) 85.2 
Cost of CDMO 63.1  —  (1.1) 62.0 
Research and development 39.2  —  3.0  42.2 
Selling, general and administrative 80.2  —  1.6  81.8 
Amortization of intangible assets 14.0  —  —  14.0 
Total operating expenses 282.0  —  3.2  285.2 
Loss from operations (42.0) —  (3.3) (45.3)
Other income (expense):
Interest expense (8.5) —  —  (8.5)
Other, net (13.4) —  —  (13.4)
Total other income (expense), net (21.9) —  (21.9)
Loss before income taxes (63.9) —  (3.3) (67.2)
Income tax provision (benefit) 11.8  8.1  —  19.9 
Net loss $ (75.7) $ (8.1) $ (3.3) $ (87.1)
Net loss per common share
Basic $ (1.52) $ (0.16) $ (0.07) $ (1.75)
Diluted $ (1.52) $ (0.16) $ (0.07) $ (1.75)
Weighted average shares outstanding
Basic 49.9  —  —  49.9 
Diluted 49.9  —  —  49.9 
38

 
 Nine Months Ended
 
 September 30, 2022
Previously Reported Tax Adjustments Other Adjustments As Restated
Revenues:    
Product sales, net $ 660.5  $ —  $ —  $ 660.5 
CDMO:
Services 90.7  —  (2.9) 87.8 
Leases 4.7  —  —  4.7 
Total CDMO revenues 95.4  —  (2.9) 92.5 
Contracts and grants 34.3  —  —  34.3 
Total revenues 790.2  —  (2.9) 787.3 
Operating expenses:
Cost of product sales 256.8  —  —  256.8 
Cost of CDMO 217.5  —  (1.7) 215.8 
Research and development 135.4  —  5.9  141.3 
Selling, general and administrative 246.1  —  —  246.1 
Amortization of intangible assets 42.0  —  —  42.0 
Total operating expenses 897.8  —  4.2  902.0 
Loss from operations (107.6) —  (7.1) (114.7)
Other income (expense):
Interest expense (24.5) —  (24.5)
Other, net (18.4) —  (18.4)
Total other income (expense), net (42.9) —  —  (42.9)
Loss before income taxes (150.5) —  (7.1) (157.6)
Income tax provision (benefit) (14.7) 1.7  —  (13.0)
Net loss $ (135.8) $ (1.7) $ (7.1) $ (144.6)
Net loss per common share
Basic $ (2.71) $ (0.03) $ (0.14) $ (2.88)
Diluted $ (2.71) $ (0.03) $ (0.14) $ (2.88)
Weighted average shares outstanding
Basic 50.2  —  —  50.2 
Diluted 50.2  —  —  50.2 

39

The following table presents the impact of the financial statement adjustments on the Company's previously reported Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022:
Nine Months Ended
September 30, 2022
Previously Reported Tax Adjustments Other Adjustments As Restated
Operating Activities
Net loss $ (135.8) $ (1.7) $ (7.1) $ (144.6)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 33.4  —  —  33.4 
Depreciation and amortization 107.7  —  (0.1) 107.6 
Change in fair value of contingent obligations, net 2.4  —  —  2.4 
Amortization of deferred financing costs 3.1  —  —  3.1 
Deferred income taxes 23.0  2.5  —  25.5 
Other 13.0  —  —  13.0 
Changes in operating assets and liabilities:
Accounts receivable 76.2  —  6.3  82.5 
Inventories (112.2) —  9.4  (102.8)
Prepaid expenses and other assets (29.2) —  (5.1) (34.3)
Accounts payable (9.0) —  (2.8) (11.8)
Accrued expenses and other liabilities (47.8) —  (0.6) (48.4)
Accrued compensation (5.7) —  —  (5.7)
Income taxes receivable and payable, net (50.2) (0.8) —  (51.0)
Contract liabilities 4.2  —  —  4.2 
Net cash used in operating activities (126.9) —  —  (126.9)
Investing Activities
Purchases of property, plant and equipment (92.2) —  —  (92.2)
Asset acquisitions (243.7) —  —  (243.7)
Net cash used in investing activities (335.9) —  —  (335.9)
Financing Activities
Purchases of treasury stock (81.9) —  —  (81.9)
Proceeds from revolving credit facility 238.0  —  —  238.0 
Principal payments on term loan facility (25.3) —  —  (25.3)
Proceeds from stock-based compensation activity 3.0  —  —  3.0 
Taxes paid for stock-based compensation activity (5.7) —  —  (5.7)
Net cash provided by financing activities: 128.1  —  —  128.1 
Effect of exchange rate changes on cash, cash equivalents and restricted cash (0.6) —  —  (0.6)
Net change in cash, cash equivalents and restricted cash (335.3) —  —  (335.3)
Cash, cash equivalents and restricted cash, beginning of period 576.3  —  —  576.3 
Cash, cash equivalents and restricted cash, end of period $ 241.0  $ —  $ —  $ 241.0 
Supplemental disclosure of cash flow information:
Cash paid for interest $ 26.7  $ —  $ —  $ 26.7 
Cash paid for income taxes $ 23.9  $ —  $ —  $ 23.9 
Supplemental information on non-cash investing and financing activities:
Purchases of property, plant and equipment unpaid at period end $ 10.0  $ —  $ —  $ 10.0 
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents $ 240.9  $ —  $ —  $ 240.9 
Restricted cash 0.1  —  —  0.1 
Total $ 241.0  $ —  $ —  $ 241.0 
40

The following table presents the impact of the financial statement adjustments on the Company's previously reported Quarterly Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and June 30, 2022:
Three Months Ended Three Months Ended
March 31, 2022 June 30, 2022
Previously Reported Tax Adjustments Other Adjustments As Revised Previously Reported Tax Adjustments Other Adjustments As Revised
Total revenues $ 307.5  $ —  $ (2.7) $ 304.8  $ 242.7  $ —  $ (0.1) $ 242.6 
Cost of product sales $ 80.3  $ —  $ (0.9) $ 79.4  $ 91.0  $ —  $ 1.2  $ 92.2 
Cost of CDMO $ 75.6  $ —  $ (1.6) $ 74.0  $ 78.8  $ —  $ 1.0  $ 79.8 
Income (loss) from operations $ 6.4  $ —  $ 0.5  $ 6.9  $ (72.0) $ —  $ (4.3) $ (76.3)
Net income (loss) $ (3.7) $ (1.4) $ 0.5  $ (4.6) $ (56.4) $ 7.8  $ (4.3) $ (52.9)
Net income (loss) per common share:
Basic $ (0.07) $ (0.03) $ 0.01  $ (0.09) $ (1.13) $ 0.16  $ (0.09) $ (1.06)
Diluted $ (0.07) $ (0.03) $ 0.01  $ (0.09) $ (1.13) $ 0.16  $ (0.09) $ (1.06)
The following table presents the impact of the financial statement adjustments on the Company's previously reported Quarterly Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and June 30, 2023:
Three Months Ended Three Months Ended
March 31, 2023 June 30, 2023
Previously Reported Tax Adjustments Other Adjustments As Revised Previously Reported Tax Adjustments Other Adjustments As Revised
Total revenues $ 165.1  $ —  $ (0.8) $ 164.3  $ 337.9  $ —  $ —  $ 337.9 
Cost of product sales $ 102.9  $ —  $ (1.7) $ 101.2  $ 134.9  $ —  $ —  $ 134.9 
Cost of CDMO $ 52.2  $ —  $ (0.5) $ 51.7  $ 55.7  $ —  $ —  $ 55.7 
Income (loss) from operations $ (148.1) $ —  $ 0.5  $ (147.6) $ (292.9) $ —  $ —  $ (292.9)
Net income (loss) $ (183.0) $ (3.7) $ 0.5  $ (186.2) $ (261.3) $ (0.1) $ —  $ (261.4)
Net income (loss) per common share:
Basic $ (3.65) $ (0.07) $ 0.01  $ (3.71) $ (5.15) $ (0.01) $ —  $ (5.16)
Diluted $ (3.65) $ (0.07) $ 0.01  $ (3.71) $ (5.15) $ (0.01) $ —  $ (5.16)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes and other financial information included elsewhere in this quarterly report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K/A for the year ended December 31, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q includes information with respect to our plans and strategy for our business and financing, as well as forward-looking statements that involve risks and uncertainties. You should carefully review the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
BUSINESS OVERVIEW
Emergent BioSolutions Inc. (“Emergent,” the “Company,” “we,” “us,” and “our”) is a global life sciences company focused on providing innovative preparedness and response solutions addressing accidental, deliberate, and naturally occurring Public Health Threats (“PHTs”). The Company's solutions include a product portfolio, a product development portfolio, and a contract development and manufacturing (“CDMO”) services portfolio.
We are currently focused on the following four PHT categories: chemical, biological, radiological, nuclear and explosives (“CBRNE”); emerging infectious diseases (“EID”); public health crises; and acute, emergency and community care. We have a product portfolio of 12 products that contribute a substantial portion of our revenue and are sold to government and commercial customers. Additionally, we have a development pipeline consisting of a diversified mix of both pre-clinical and clinical stage product candidates. Finally, we have a fully integrated portfolio of CDMO services. Our CDMO service offerings cover development services, drug substance manufacturing and drug product manufacturing and packaging.
The Company structures the business with a focus on markets and customers. As such, the key components of the business structure include the following four product and service categories: Anthrax - Medical Countermeasures (“MCM") Products, NARCAN®, Smallpox - MCM products and CDMO Services. The Company operates as two operating segments: (1) a products segment (“Products”) consisting of the Anthrax - MCM, NARCAN®, Smallpox - MCM and Other products and (2) a services segment (“Services”) consisting of our CDMO services.
Products Segment:
The majority of our product revenue comes from the following products and procured product candidates:
Anthrax - MCM Products
•Anthrasil® (Anthrax Immune Globulin Intravenous (human)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada for the treatment of inhalational anthrax in combination with appropriate antibacterial drugs;
•BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the United States Food and Drug Administration (“FDA”) for the general use prophylaxis and post-exposure prophylaxis of anthrax disease;
•CYFENDUSTM (Anthrax vaccine adsorbed (AVA), adjuvanted), previously known as AV7909, which was recently approved by the FDA for post-exposure prophylaxis of disease following suspected or confirmed exposure to Bacillus anthracis in persons 18 through 65 years of age when administered in conjunction with recommended antibacterial drugs. CYFENDUSTM is procured by certain authorized government buyers for their use; and
•Raxibacumab injection, the first fully human monoclonal antibody therapeutic licensed by the FDA for the treatment and prophylaxis of inhalational anthrax.
NARCAN®
•NARCAN® (naloxone HCl) Nasal Spray, an intranasal formulation of naloxone approved by the FDA (including in over-the-counter form) and Health Canada for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression.
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Smallpox - MCM Products
•ACAM2000®, (Smallpox (Vaccinia) Vaccine, Live), the only single-dose smallpox vaccine licensed by the FDA for active immunization against smallpox disease for persons determined to be at high risk for smallpox infection;
•CNJ-016® (Vaccinia Immune Globulin Intravenous (Human) (VIGIV)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada to address certain complications from smallpox vaccination; and
•TEMBEXA®, an oral antiviral formulated as 100 mg tablets and 10 mg/mL oral suspension dosed once weekly for two weeks which has been approved by the FDA for the treatment of smallpox disease caused by variola virus in adult and pediatric patients, including neonates.
Other Products
•BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), the only heptavalent antitoxin licensed by the FDA and Health Canada for the treatment of symptomatic botulism;
•Ebanga™ (ansuvimab-zykl), a monoclonal antibody with antiviral activity provided through a single IV infusion for the treatment of Ebola. Under the terms of a collaboration with Ridgeback Biotherapeutics ("Ridgeback"). Emergent will be responsible for the manufacturing, sale, and distribution of Ebanga™ in the U.S. and Canada, and Ridgeback will serve as the global access partner for Ebanga™;
•RSDL® (Reactive Skin Decontamination Lotion Kit), the only medical device cleared by the FDA that is intended to remove or neutralize chemical warfare agents from the skin, including: tabun, sarin, soman, cyclohexyl sarin, VR, VX, mustard gas and T-2 toxin; and
•Trobigard® atropine sulfate, obidoxime chloride auto-injector, a combination drug-device auto-injector procured product candidate that contains atropine sulfate and obidoxime chloride. It was approved in Belgium in 2021 but has not been approved by the FDA. Trobigard® is procured by certain authorized government buyers under special circumstances for potential use as a nerve agent countermeasure outside of the U.S.
Services Segment:
Services - Contract Development and Manufacturing
Our services revenue consists of distinct but interrelated CDMO services: drug substance manufacturing; drug product manufacturing (also referred to as "fill/finish" services) and packaging; development services including technology transfer, process and analytical development services; and, when necessary, suite reservation obligations. These services, which we refer to as "molecule-to-market" offerings, employ diverse technology platforms (mammalian, microbial, viral and plasma) across a network of nine geographically distinct development and manufacturing sites operated by us for our internal products and pipeline candidates and third-party CDMO services. We service both clinical-stage and commercial-stage projects for a variety of third-party customers, including government agencies, innovative pharmaceutical companies, and non-government organizations. In August 2023, the Company initiated an organizational restructuring plan (the “August 2023 Plan”) which included actions to reduce investment in and de-emphasize focus on its CDMO services business.
Other Strategic Activities
January 2023 Organizational Restructuring Plan
In January 2023, the Company initiated an organizational restructuring plan (the “January 2023 Plan”) intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. As part of the January 2023 Plan, the Company reduced its workforce by approximately 125 employees. The Company incurred approximately $9.4 million in charges in connection with the January 2023 Plan during the nine months ended September 30, 2023. These charges consist primarily of charges related to employee transition, severance payments and employee benefits. All activities related to the January 2023 Plan were substantially completed during the first quarter of 2023.
Sale of Travel Health Business to Bavarian Nordic
On May 15, 2023, pursuant to the Purchase and Sale Agreement (the "Purchase and Sale Agreement"), by and between the Company, through its wholly owned subsidiaries Emergent International Inc. and Emergent Travel Health Inc., and Bavarian Nordic, the Company completed the previously announced sale of the Company's travel health business, including rights to Vivotif®, the licensed typhoid vaccine; Vaxchora®, the licensed cholera vaccine; the development-stage chikungunya vaccine candidate CHIKV VLP; the Company’s manufacturing site in Bern, Switzerland; and certain of its development facilities in San Diego, California.
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At the closing, Bavarian Nordic paid a cash purchase price of $270.0 million, exclusive of customary closing adjustments for cash, indebtedness, working capital and transaction expenses of the business at closing. Bavarian Nordic may also be required to pay milestone payments of up to $80.0 million related to the development of CHIKV VLP and receipt of marketing approval and authorization in the U.S. and Europe, and earn-out payments of up to $30.0 million based on aggregate net sales of Vaxchora and Vivotif in calendar year 2026.
As a result of the divestiture, the Company recognized a pre-tax gain of $74.2 million during nine months ended September 30, 2023, net of transaction costs of $4.0 million, which was recorded within "Gain on sale of business" on the Condensed Consolidated Statements of Operations.
FDA Approval of CYFENDUSTM
On July 20, 2023, the FDA approved CYFENDUS™ for post-exposure prophylaxis of disease following suspected or confirmed exposure to Bacillus anthracis in persons 18 through 65 years of age when administered in conjunction with recommended antibacterial drugs. In December 2018, CYFENDUSTM vaccine was the subject of a pre-emergency use authorization package submitted to the FDA. The following year, the USG began procuring this product for national preparedness efforts.
EbangaTM Procurement Contract
On July 31, 2023, the Company was awarded a 10-year contract by the Biomedical Advanced Research and Development Authority ("BARDA") for advanced development, manufacturing scale-up, and procurement of EbangaTM treatment for Ebola. The contract consists of a base period of performance with two option periods valued at approximately $121 million, and five option periods for procurement of EbangaTM over five years valued at up to $583 million. If all option periods are exercised, the total contract value will be valued at up to approximately $704 million.
Emergent is responsible for the manufacturing, sale, and distribution of EbangaTM in the U.S. and Canada pursuant to a collaboration agreement with Ridgeback, the developer of the treatment.
Emergent paid Ridgeback $6.3 million in contingent consideration as a result of the award of the BARDA contract in the third quarter of 2023. In addition, the Company could owe up to $50.4 million in contingent consideration to Ridgeback if activities under the awarded contract have not ceased by June 1, 2026.
August 2023 Organizational Restructuring Plan
In August 2023, the Company initiated the August 2023 Plan intended to strengthen its core business and financial position by reducing investment in and de-emphasizing focus on its CDMO services business for future growth. As part of the August 2023 Plan, the Company reduced its workforce by approximately 400 employees. The Company incurred approximately $20.5 million in charges in connection with the August 2023 Plan during the nine months ended September 30, 2023. These charges consist primarily of charges related to severance payments, transition services, and employee benefits. All activities related to the August 2023 Plan were substantially completed during the third quarter of 2023.
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Launch of NARCAN® Naloxone HCl Nasal Spray 4 mg Over-The-Counter ("NARCAN® OTC")
In the third quarter of 2023, the Company launched NARCAN® OTC, which was approved by the FDA as an over-the-counter emergency treatment of opioid overdose, broadening our customer base and sales channels to retail pharmacies and digital commerce websites. The Company's Nasal Naloxone products are now sold commercially over-the-counter at retail pharmacies and digital commerce websites as well as through physician-directed or standing order prescriptions at retail pharmacies, health departments, local law enforcement agencies, community-based organizations, substance abuse centers and other federal agencies.
Interim Period Triggering Events
Goodwill Impairment Testing
The Company performs its goodwill impairment evaluation annually, during the fourth quarter, or sooner if triggering events are identified. During the three months ended September 30, 2023, the Company observed continued market volatility including significant declines in its market capitalization and revised its financial outlook during the third quarter, which was identified as a triggering event. As a result of the quantitative assessments performed in connection with the preparation of the financial statements as of and for the quarter ended September 30, 2023, the Company recorded a $218.2 million non-cash goodwill impairment charge for the MCM reporting unit within the Products segment, which is included in "Goodwill impairment" on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2023. The MCM reporting unit and Products segment had no remaining goodwill as of September 30, 2023. The goodwill impairment charge resulted from a reduction in the estimated fair value of the MCM reporting unit due to changes in the risk profile of the Company as well as revisions to the long-term operating plan that reflected lower expectations for growth and profitability than previous expectations. The Company used a quantitative assessment, utilizing an income-based (discounted cash flows) approach, Level 3 non-recurring fair value measurement, for our goodwill impairment testing.
Long-Lived Asset Impairment Testing
The Company tests its long-lived assets that are held and used for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable.
During the second quarter of 2023, due to deterioration in performance and resulting downward revisions to our internal CDMO forecast made during the second quarter, including future expected cash flows, the Company determined there were sufficient indicators of impairment on certain asset groups within the CDMO reporting unit to require an impairment analysis. As a result, the Company performed recoverability tests on certain asset groups within the CDMO reporting unit and concluded that the impacted asset groups were not recoverable as the undiscounted expected cash flows did not exceed their carrying values.
Asset groups are written down only to the extent that their carrying value is higher than their respective fair value. The Company, with the assistance of a third-party valuation firm, applied valuation methods to estimate the fair values for each of the assets within the different asset classes. For the intangible assets, an option pricing model was applied to estimate the assets' fair value. An orderly liquidation value was applied to estimate the fair value of the personal property assets and market and cost based approaches were applied to estimate the fair value of the real property assets, each representing Level 3 non-recurring fair value measurements. Based on this analysis, the Company allocated and recognized a non-cash impairment charge of $306.7 million during the nine months ended September 30, 2023.
FINANCIAL OPERATIONS OVERVIEW
Revenues
We generate product revenues from the sale of our marketed products and procured product candidates. The U.S. Government ("USG") is the largest purchaser of our Government - MCM products and primarily purchases our products for the Strategic National Stockpile ("SNS"), a national repository of medical countermeasures including critical antibiotics, vaccines, chemical antidotes, antitoxins, and other critical medical supplies. The USG primarily purchases our products under long-term, firm fixed-price procurement contracts, generally with annual options. Our opioid overdose treatment product, NARCAN® Nasal Spray, is sold commercially through wholesalers and distributors, physician-directed or standing order prescriptions at retail pharmacies, to state and local community healthcare agencies, practitioners and hospitals and, beginning in the third quarter of 2023, over-the-counter at retail pharmacies and digital commerce websites.
We also generate revenue from our CDMO services, which is based on our established development and manufacturing infrastructure, technology platforms and expertise. Our services include a fully integrated molecule-to-market CDMO services business offering across development services, drug substance and drug product for small to large pharmaceutical and biotechnology industry and government agencies/non-governmental organizations.
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From time to time, clients require suite reservations at our various manufacturing sites, which may be considered leases depending on the facts and circumstances.
We have received contracts and grant funding from the USG and other non-governmental organizations to perform research and development ("R&D") activities, particularly related to programs addressing certain CBRNE threats and EIDs.
Our revenue, operating results and profitability vary quarterly based on the timing of production and deliveries, the timing of manufacturing services performed and the nature of our business, which involves providing large scale bundles of products and services as needs arise. We expect continued variability in our quarterly financial results.
Cost of product sales and CDMO services
Products - The primary expenses that we incur to deliver our products consist of fixed and variable costs. We determine the cost of product sales for products sold during a reporting period based on the average manufacturing cost per unit in the period those units were manufactured. Fixed manufacturing costs include facilities and utilities costs. Variable manufacturing costs primarily consist of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing operations, sales-based royalties, shipping and logistics. In addition to the fixed and variable manufacturing costs described above, the cost of product sales depends on utilization of available manufacturing capacity. For our commercial sales, other associated expenses include sales-based royalties (which include fair value adjustments associated with contingent consideration), shipping, and logistics.
Services - The primary expenses that we incur to deliver our CDMO services consist of fixed and variable costs, including personnel, equipment, and facilities costs. Our manufacturing process includes the production of bulk material and performing drug product work for containment and distribution of biological products. For drug product customers, we receive work in process inventory to be prepared for distribution.
R&D expenses
We expense R&D costs as incurred. Our R&D expenses consist primarily of:
▪personnel-related expenses;
▪fees to professional service providers for, among other things, analytical testing, independent monitoring or other administration of our clinical trials and obtaining and evaluating data from our clinical trials and non-clinical studies;
▪costs of CDMO services for our clinical trial material; and
▪costs of materials intended for use and used in clinical trials and R&D.
In many cases, we seek funding for development activities from external sources and third parties, such as governments and non-governmental organizations, or through collaborative partnerships. We expect our R&D spending will be dependent upon such factors as the results from our clinical trials, the availability of reimbursement of R&D spending, the number of product candidates under development, the size, structure and duration of any clinical programs that we may initiate, the costs associated with manufacturing and development of our product candidates on a large-scale basis for later stage clinical trials, and our ability to use or rely on data generated by government agencies.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of personnel-related costs and professional fees in support of our executives, sales and marketing, business development, government affairs, finance, accounting, information technology, legal, human resource functions and other corporate functions. Other costs include facility costs not otherwise included in cost of product sales and CDMO services or R&D expense.
Income taxes
Uncertainty in income taxes is accounted for using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
Management believes that the assumptions and estimates related to the provision for income taxes are critical to the Company’s results of operations.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S., requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from these estimates. There have been no significant changes to our critical accounting policies and estimates contained in "Critical Accounting Policies and Estimates" in the Management's Discussion and Analysis, in Part II, Item 7, of our Annual Report on Form 10-K/A for the year ended December 31, 2022, as filed with the SEC.
New accounting standards
For a discussion of new accounting standards please see Note 2, "Summary of significant accounting policies", in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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RESULTS OF OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 $ Change % Change 2023 2022 $ Change % Change
(in millions, except %) (As Restated) (As Restated)
Revenues
Product sales, net:        
Anthrax MCM $ 32.9  $ 28.4  $ 4.5  16  % $ 76.0  $ 233.7  $ (157.7) (67) %
NARCAN 142.1  87.9  54.2  62  % 376.4  282.6  93.8  33  %
Smallpox MCM 24.7  50.4  (25.7) (51) % 155.8  89.8  66.0  73  %
Other Products sales 50.1  19.5  30.6  157  % 87.2  54.4  32.8  60  %
Total product sales, net 249.8  186.2  63.6  34  % 695.4  660.5  34.9  5  %
Contract development and manufacturing (“CDMO”):
Services 13.2  36.1  (22.9) (63) % 52.2  87.8  (35.6) (41) %
Leases 1.0  0.2  0.8  NM 5.5  4.7  0.8  17  %
Total CDMO revenues 14.2  36.3  (22.1) (61) % 57.7  92.5  (34.8) (38) %
Contracts and grants 6.5  17.4  (10.9) (63) % 19.6  34.3  (14.7) (43) %
Total revenues 270.5  239.9  30.6  13  % 772.7  787.3  (14.6) (2) %
Operating expenses:
Cost of product sales 132.5  85.2  47.3  56  % 368.6  256.8  111.8  44  %
Cost of CDMO 44.3  62.0  (17.7) (29) % 151.7  215.8  (64.1) (30) %
Goodwill impairment 218.2  —  218.2  NM 218.2  —  218.2  NM
Impairment of long-lived assets —  —  —  NM 306.7  —  306.7  NM
Research and development 15.3  42.2  (26.9) (64) % 82.0  141.3  (59.3) (42) %
Selling, general and administrative 86.0  81.8  4.2  5  % 278.7  246.1  32.6  13  %
Amortization of intangible assets 16.3  14.0  2.3  16  % 49.4  42.0  7.4  18  %
Total operating expenses 512.6  285.2  227.4  80  % 1,455.3  902.0  553.3  61  %
Loss from operations (242.1) (45.3) (196.8) NM (682.6) (114.7) (567.9) NM
Other income (expense):
Interest expense (19.7) (8.5) (11.2) 132  % (66.2) (24.5) (41.7) 170  %
Gain on sale of business (0.7) —  (0.7) NM 74.2  —  74.2  NM
Other, net (3.4) (13.4) 10.0  (75) % (2.1) (18.4) 16.3  (89) %
Total other income (expense), net (23.8) (21.9) (1.9) 9  % 5.9  (42.9) 48.8  (114) %
Loss before income taxes (265.9) (67.2) (198.7) NM (676.7) (157.6) (519.1) NM
Income tax provision (benefit) (2.5) 19.9  (22.4) (113) % 34.3  (13.0) 47.3  NM
Net loss $ (263.4) $ (87.1) $ (176.3) NM $ (711.0) $ (144.6) $ (566.4) NM
NM - Not meaningful
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Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022
Revenues and gross margin
Total revenues increased $30.6 million, or 13%, to $270.5 million for the three months ended September 30, 2023. The increase was due to an increase in Products revenue of $63.6 million, offset by a decrease in Services revenue of $22.1 million and contracts and grants revenue of $10.9 million.
Consolidated gross margin increased $11.9 million, or 16%, to $87.2 million for the three months ended September 30, 2023. Consolidated gross margin percentage was consistent with the prior period at 33% for the three months ended September 30, 2023. The increase in consolidated gross margin was due to an increase in Products gross margin of $16.3 million, offset by a decrease in Services gross margin of $4.4 million. Consolidated gross margin and consolidated gross margin percentage excludes contracts and grants revenues because the related costs are R&D expenses.
See "Segment Results" for an expanded discussion of revenues and gross margin.
Unallocated corporate operating expenses
R&D expenses
R&D expenses decreased $26.9 million, or 64%, to $15.3 million for the three months ended September 30, 2023. The decrease was primarily due to the sale of our development program for CHIKV VLP to Bavarian Nordic and reduction in related overhead costs driven by the headcount reductions, which were significant contributors to prior period R&D expense.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $4.2 million, or 5%, to $86.0 million for the three months ended September 30, 2023. The increase was primarily due to an increase in marketing expenses related to the launch of NARCAN® OTC and higher professional services fees related to legal remediation services. The increase was partially offset by decreases in compensation and other employee costs related to the restructuring initiatives during 2023. Selling, general and administrative expenses as a percentage of total revenue decreased 2.3 percentage points to 31.8% for the three months ended September 30, 2023.
Amortization of intangible assets
Amortization of intangible assets increased $2.3 million, or 16%, to $16.3 million for the three months ended September 30, 2023. The increase was primarily due to amortization expense for intangible assets related to TEMBEXA® ,NARCAN®, and EbangaTM which were acquired during the second half of 2022. The increase was partially offset by a decrease in amortization expense resulting from the intangibles sold as part of our travel health business to Bavarian Nordic.
Goodwill impairment
The Company recognized a $218.2 million impairment charge to goodwill in the MCM reporting unit within the Products segment during the three months ended September 30, 2023, reducing the goodwill balance of the reporting unit and segment to zero as of September 30, 2023.
Interest expense
Interest expense increased $11.2 million, or 132%, to $19.7 million for the three months ended September 30, 2023. The increase was primarily due to higher interest costs related to our syndicated borrowings and debt service costs attributable to the negotiation of the Fourth Amendment to Amended and Restated Credit Agreement, Waiver and First Amendment to Amended and Restated Collateral Agreement (the “Credit Agreement Amendment"), partially offset by reduced interest expense related to the termination of our interest rate swap hedging agreements.
Other, net
Other, net decreased $10.0 million to $3.4 million in expense for the three months ended September 30, 2023. The decrease in expense was primarily attributable to a write-off of a tax indemnity receivable in the prior period that did not reoccur in the current period and favorable foreign currency exchange revaluations.
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Gain on sale of business
During the three months ended September 30, 2023, the Company recorded a $0.7 million reduction to the gain on sale of our travel health business to Bavarian Nordic, which occurred on May 15, 2023. The reduction represents a net working capital adjustment, payable to Bavarian Nordic.
Income tax provision (benefit)
Income tax provision of $19.9 million for the three months ended September 30, 2022 decreased by $22.4 million to a benefit of $2.5 million for the three months ended September 30, 2023. The decrease was primarily due to an increase in taxable loss offset by valuation allowance and goodwill impairment charges.
Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022
Revenues and gross margin
Total revenues decreased $14.6 million, or 2%, to $772.7 million for the nine months ended September 30, 2023. The decrease was due to decreases in Services revenue of $34.8 million and contracts and grants revenue of $14.7 million, offset by an increase in Products revenue of $34.9 million.
Consolidated gross margin decreased $47.6 million, or 17%, to $232.8 million for the nine months ended September 30, 2023. Consolidated gross margin percentage decreased 6 percentage points to 31% for the nine months ended September 30, 2023. The decrease in consolidated gross margin was due to a decrease in Products gross margin of $76.9 million, offset by an increase in Services gross margin of $29.3 million. Consolidated gross margin and consolidated gross margin percentage excludes contracts and grants revenues because the related costs are R&D expenses.
See "Segment Results" for an expanded discussion of revenues and gross margin.
Unallocated corporate operating expenses
R&D expenses
R&D expenses decreased $59.3 million, or 42%, to $82.0 million for the nine months ended September 30, 2023. The decrease was primarily due to the sale of our development program for CHIKV VLP to Bavarian Nordic and reduction in related overhead costs driven by the headcount reductions, which were significant contributors to prior period R&D expense, partially offset by increases in funded R&D related to EbangaTM.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $32.6 million, or 13%, to $278.7 million for the nine months ended September 30, 2023. The increase was primarily due to higher legal remediation services fees and professional services fees related to corporate initiatives, including organizational transformation consulting fees, and an increase in marketing expenses largely related to the launch of NARCAN® OTC. These increases were partially offset by decreases in employee costs related to the restructuring initiatives during 2023. Selling, general and administrative expenses as a percentage of total revenue increased 4.8 percentage points to 36.1% for the nine months ended September 30, 2023.
Amortization of intangible assets
Amortization of intangible assets increased $7.4 million, or 18%, to $49.4 million for the nine months ended September 30, 2023. The increase was primarily due to amortization expense for intangible assets related to TEMBEXA® , NARCAN® and EbangaTM which were acquired during the second half of 2022. The increase was partially offset by a decrease in amortization expense resulting from the intangibles sold with our travel health business to Bavarian Nordic.
Goodwill impairment
The Company recognized a $218.2 million impairment charge to goodwill in the MCM reporting unit within the Products segment during the nine months ended September 30, 2023, reducing the goodwill balance of the reporting unit and segment to zero as of September 30, 2023.
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Impairment of long-lived assets
During the nine months ended September 30, 2023, the Company recorded a non-cash impairment charge of $306.7 million related to certain asset groups within our CDMO reporting unit. The asset groups were written down only to the extent their carrying value was higher than their respective fair values. The Company, with the assistance of a third-party valuation firm, applied valuation methods to estimate the fair values for each of the assets within the different asset classes to determine the amount of the impairment.
Interest expense
Interest expense increased $41.7 million, or 170%, to $66.2 million for the nine months ended September 30, 2023. The increase was primarily due to higher interest costs related to our syndicated borrowings and one-time debt service costs attributable to the negotiation of the Credit Agreement Amendment, partially offset by reduced interest expense related to the termination of our interest rate swap hedging agreements.
Other, net
Other, net decreased $16.3 million to $2.1 million in expense for the nine months ended September 30, 2023. The decrease in expense was primarily attributable to the write-off of a tax indemnity receivable in the prior period that did not reoccur in the current period and favorable foreign currency exchange revaluations.
Gain on sale of business
Gain on sale of business was $74.2 million for the nine months ended September 30, 2023, which was attributable to the sale of our travel health business to Bavarian Nordic on May 15, 2023.
Income tax provision (benefit)
Income tax benefit of $13.0 million for the nine months ended September 30, 2022 decreased by $47.3 million to a provision of $34.3 million for the nine months ended September 30, 2023. The decrease was largely due to the decline in income before income taxes and valuation allowance and goodwill impairment charges in 2023. The effective tax rate was (5)% for the nine months ended September 30, 2023 as compared with 8% in 2022. The effective annual tax rate decreased largely due to a valuation charge.
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SEGMENT RESULTS
PRODUCTS SEGMENT
   Products Segment
Three Months Ended September 30,
 Nine Months Ended September 30,
(dollars in millions) 2023 2022 % Change 2023 2022 % Change
Revenues
Product sales, net $ 249.8  $ 186.2  34  % $ 695.4  $ 660.5  5  %
Cost of sales $ 132.5  $ 85.2  56  % $ 368.6  $ 256.8  44  %
Less: Changes in fair value of contingent consideration (1.1) 0.6  NM (0.4) 2.4  (117  %)
Less: Restructuring costs 5.0  —  NM 7.0  —  NM
Less: Inventory step-up provision —  —  NM 1.9  —  NM
Adjusted cost of sales (1)
 $ 128.6  $ 84.6  52  % $ 360.1  $ 254.4  42  %
Gross margin (2)
 $ 117.3  $ 101.0  16  % $ 326.8  $ 403.7  (19  %)
Gross margin % (2)
 47  % 54  % 47  % 61  %
Adjusted gross margin (3)
 $ 121.2  $ 101.6  19  % $ 335.3  $ 406.1  (17  %)
Adjusted gross margin % (3)
 49  % 55  % 48  % 61  %
(1) Adjusted cost of sales, which is a non-GAAP financial measure, is calculated as cost of sales less restructuring costs and other special items and non-cash items related to changes in fair value of contingent consideration and inventory step-up provision. The Company's management utilizes Adjusted cost of sales for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP operating measure, when reviewed collectively with our GAAP financial information, provides useful supplementary information to investors in assessing our operating performance.
(2) Gross margin is calculated as revenues less cost of sales. Gross margin % is calculated as gross margin divided by revenues.
(3) Adjusted gross margin, which is a non-GAAP financial measure, is calculated as revenues less Adjusted cost of sales. Adjusted gross margin %, which is a non-GAAP financial measure, is calculated as Adjusted gross margin divided by revenues. The Company’s management utilizes Adjusted gross margin and Adjusted gross margin % for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance.
NM - Not meaningful
Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022
Anthrax MCM
Anthrax MCM sales increased $4.5 million, or 16%, to $32.9 million for the three months ended September 30, 2023. The increase reflects the impact of timing of sales related to CYFENDUSTM, partially offset by a decrease in BioThrax® and Anthrasil® sales, due to timing. Anthrax vaccine product sales are primarily made under annual purchase options exercised by the USG. Fluctuations in revenues result from the timing of the exercise of annual purchase options, the timing of USG purchases, the availability of governmental funding and Company delivery of orders that follow.
NARCAN®
NARCAN® sales increased $54.2 million, or 62%, to $142.1 million for the three months ended September 30, 2023. The increase was primarily driven by higher branded NARCAN® sales to U.S. public interest channels and Canadian retail sales and sales of NARCAN® OTC during the third quarter of 2023, partially offset by the cessation of authorized generic NARCAN® sales related to the termination of the Company's relationship with Sandoz.
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Smallpox MCM
Smallpox MCM sales decreased $25.7 million, or 51%, to $24.7 million, for the three months ended September 30, 2023. The decrease was primarily due to ACAM2000® sales to non-U.S. customers in the prior year quarter which did not occur this quarter, partially offset by higher VIGIV sales due to timing. Fluctuations in revenues from Smallpox MCM result from the timing of the exercise of annual purchase options in the existing procurement contracts, the timing of USG purchases, the availability of governmental funding and Company delivery of orders that follow.
Other Products
Other Products sales increased $30.6 million, or 157%, to $50.1 million for the three months ended September 30, 2023. The increase was primarily due to higher BAT product sales, partially offset by lower sales of RSDL®; Vivotif, which we sold to Bavarian Nordic in the second quarter od 2023 as part of our travel health business; and Trobigard®, due to timing.
Cost of Product Sales and Gross Margin
Cost of product sales increased $47.3 million, or 56%, to $132.5 million for the three months ended September 30, 2023. The increase was primarily due to higher sales of NARCAN®, BAT®, VIGIV and CYFENDUSTM, partially offset by lower sales of ACAM2000®, BioThrax® and COGS associated with products sold to Bavarian Nordic as part of our travel health business, coupled with higher allocations to product COGS at our Bayview facility and an increase in shutdown related costs in the current period.
Product gross margin increased $16.3 million, or 16%, to $117.3 million for the three months ended September 30, 2023. Product gross margin percentage decreased 7 percentage points to 47% for the three months ended September 30, 2023. The decrease in gross margin percentage was primarily due to unfavorable product revenue mix which was weighted more heavily to lower margin products compared with the prior year quarter, coupled with increases in shutdown related costs and inventory write-offs. Product adjusted gross margin excludes the impacts of non-cash items related to restructuring costs of $5.0 million and the changes in the fair value of contingent consideration of $1.1 million.
Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022
Anthrax MCM
Anthrax MCM sales decreased $157.7 million, or 67%, to $76.0 million for the nine months ended September 30, 2023. The decrease reflects the impact of timing of sales related to CYFENDUSTM and BioThrax, partially offset by an increase in Anthrasil® sales. Anthrax vaccine product sales are primarily made under annual purchase options exercised by the USG. Fluctuations in revenues result from the timing of the exercise of annual purchase options, the timing of USG purchases, the availability of governmental funding and Company delivery of orders that follow.
NARCAN®
NARCAN® sales increased $93.8 million, or 33%, to $376.4 million for the nine months ended September 30, 2023. The increase was primarily driven by higher branded NARCAN® sales to U.S. public interest channels and Canadian retail sales and sales of NARCAN® OTC during the third quarter of 2023, partially offset by the cessation of authorized generic NARCAN® sales related to the termination of the Company's relationship with Sandoz and a reduction in commercial retail sales in the U.S.
Smallpox MCM
Smallpox MCM sales increased $66.0 million, or 73%, to $155.8 million for the nine months ended September 30, 2023. The increase was primarily due to the exercise and full delivery in the second quarter of a $120 million option by the USG to purchase ACAM2000® and higher VIGIV sales due to timing, partially offset by ACAM2000® sales to non-U.S. customers in the prior year period which did not occur during the current year period. Fluctuations in revenues result from the timing of the exercise of annual purchase options in existing procurement contracts, the timing of USG purchases, the availability of governmental funding and Company delivery of orders that follow.
Other Products
Other Products sales increased $32.8 million, or 60%, to $87.2 million for the nine months ended September 30, 2023. The increase was primarily due to higher BAT® product sales and Vaxchora product sales, which we sold to Bavarian Nordic in the second quarter as part of our travel health business, partially offset by lower RSDL® and Trobigard® product sales, due to timing.
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Cost of Sales and Gross Margin
Cost of product sales increased $111.8 million, or 44%, to $368.6 million for the nine months ended September 30, 2023. The increase was primarily due to higher sales of ACAM2000®, NARCAN® and BAT®, partially offset by lower sales of CYFENDUSTM, coupled with higher allocations to product COGS at our Bayview facility, shutdown costs and inventory write-offs.
Product gross margin decreased $76.9 million, or 19%, to $326.8 million for the nine months ended September 30, 2023. Product gross margin percentage decreased 14 percentage points to 47% for the nine months ended September 30, 2023. The decrease was largely due to lower sales volumes and higher shutdown related costs and inventory write-offs, coupled with an unfavorable product revenue mix which was weighted more heavily to lower margin products compared with the prior year. Product adjusted gross margin excludes the impacts of restructuring costs of $7.0 million, non-cash items related to the inventory step-up provision of $1.9 million and the changes in the fair value of contingent consideration of $(0.4) million.
SERVICES SEGMENT
Services Segment
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2023 2022 % Change 2023 2022 % Change
Revenues
CDMO revenues $ 14.2  $ 36.3  (61  %) $ 57.7  $ 92.5  (38  %)
Cost of services $ 44.3  $ 62.0  (29  %) $ 151.7  $ 215.8  (30  %)
Less: Restructuring costs 8.1  —  NM 8.1  —  NM
Adjusted cost of services (1)
 $ 36.2  $ 62.0  $ 143.6  $ 215.8 
Gross margin (2)
 $ (30.1) $ (25.7) (17  %) $ (94.0) $ (123.3) 24  %
Gross margin % (2)
 (212) % (71) % (163) % (133) %
Adjusted gross margin (3)
 $ (22.0) $ (25.7) 14  % $ (85.9) $ (123.3) 30  %
Adjusted gross margin % (3)
 (155) % (71) % (149) % (133) %
(1) Adjusted cost of services, which is a non-GAAP financial measure, is calculated as cost of services less restructuring costs. The Company's management utilizes Adjusted cost of services for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP operating measure, when reviewed collectively with our GAAP financial information, provides useful supplemental information to investors in assessing our operating performance.
(2) Gross margin is calculated as revenues less cost of services. Gross margin % is calculated as gross margin divided by revenues.
(3) Adjusted gross margin, which is a non-GAAP financial measure, is calculated as revenues less Adjusted cost of services. Adjusted gross margin %, which is a non-GAAP financial measure, is calculated as Adjusted gross margin divided by revenues. The Company’s management utilizes Adjusted gross margin and Adjusted gross margin % for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance.
NM - Not meaningful
Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022
CDMO revenues
CDMO services revenues decreased $22.9 million, or 63%, to $13.2 million for the three months ended September 30, 2023. The decrease was driven by decreases in production at the Company's Winnipeg and Camden facilities, partially offset by an increase in production at our Canton facility for a CDMO customer.
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CDMO lease revenues increased $0.8 million to $1.0 million for the three months ended September 30, 2023. The increase was related to a CDMO customer at our Canton facility.
Cost of Services and Gross Margin
Cost of services decreased $17.7 million, or 29%, to $44.3 million for the three months ended September 30, 2023. The decrease was primarily due to higher allocations to cost of product sales and reduced production activities related to the halt in manufacturing under the Janssen Agreement at our Bayview facility, coupled with decreases in production at the Company's Camden and Winnipeg facilities, partially offset by an increase in production at our Canton facility related to work for a CDMO customer and investments in quality enhancement at our Camden facility.
Services gross margin decreased $4.4 million, or 17%, to $(30.1) million for the three months ended September 30, 2023. Services gross margin percentage decreased to (212)% for the three months ended September 30, 2023. The decrease was primarily due to lower production across our CDMO network coupled with quality enhancement and improvement initiatives at the Company's Camden facility in the current year. Services adjusted gross margin excludes the impacts of restructuring costs of $8.1 million.
Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022
CDMO revenues
CDMO services revenues decreased $35.6 million, or 41%, to $52.2 million for the nine months ended September 30, 2023. The decrease was driven by $10.9 million less revenue related to reduced production activities at the Company's Bayview facility as a result of a halt in manufacturing under the Janssen Agreement in 2022 and reduced production at the Camden facility. The decreases were partially offset by an increase in production at our Canton facility for a CDMO customer.
CDMO lease revenues increased $0.8 million, or 17%, to $5.5 million for the nine months ended September 30, 2023. The increase was related to a CDMO customer at our Canton facility.
Cost of Services and Gross Margin
Cost of services decreased $64.1 million, or 30%, to $151.7 million for the nine months ended September 30, 2023. The decrease was primarily due to reduced production activities related to the halt in manufacturing under the Janssen Agreement coupled with higher allocations to Product cost of sales at our Bayview facility and lower production activities at our Winnipeg facility, partially offset by increased costs at our Camden facility for additional investments in quality enhancement and improvement initiatives and increased costs associated with production activities at our Canton facility for a CDMO customer.
Services gross margin increased $29.3 million, or 24% to $(94.0) million for the nine months ended September 30, 2023. Services gross margin percentage decreased 30 percentage points to (163)% for the nine months ended September 30, 2023. The decrease was primarily due to the full nine month impact of additional investments in quality enhancement and improvement initiatives at the Company's Camden facility in the current year, partially offset by one-time costs and reserves related to the Janssen Agreement in the prior year. Services adjusted gross margin excludes the impacts of restructuring costs of $8.1 million.
OTHER REVENUE
Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022
Contracts and Grants
Contracts and grants revenue decreased $10.9 million, or 63%, to $6.5 million for the three months ended September 30, 2023. The decrease was primarily attributable to one-time indirect rate adjustments in the prior period and the conclusion of COVID-19 related studies in the fourth quarter of 2022. These decreases were partially offset by an increase in revenue attributable to the BARDA contract for the procurement of EbangaTM, which was awarded in the current period.
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Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022
Contracts and Grants
Contract and grants revenue decreased $14.7 million, or 43%, to $19.6 million for the nine months ended September 30, 2023. The decrease was primarily attributable to one-time indirect rate adjustments in the prior period, the conclusion of COVID-19 related studies in the fourth quarter of 2022, and decreases in development activities associated with various externally funded research and development projects. These decreases were partially offset by increases in revenue on the BARDA contract for the procurement of EbangaTM, which was awarded in the current period, and TEMBEXA®.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our financial condition is summarized as follows:
September 30, December 31,
2023 2022 Change %
(dollars in millions) (As Restated)
Financial assets:
Cash and cash equivalents $ 87.8  $ 642.6  (86) %
Borrowings:
Debt, current portion $ 413.6  $ 957.3  (57) %
Debt, net of current portion 448.2  448.5  —  %
Total borrowings $ 861.8  $ 1,405.8  (39) %
Working capital:
Current assets $ 720.8  $ 1,210.4  (40) %
Current liabilities 664.0  1,228.9  (46) %
Total working capital $ 56.8  $ (18.5) NM
NM - Not Meaningful
Principal Sources of Capital Resources
We have historically financed our operating and capital expenditures through existing cash and cash equivalents, cash from operations, development contracts and grant funding and borrowings under our Revolving Credit Facility, our Term Loan Facility, and other lines of credit we have established from time to time. We also obtain financing from the sale of our common stock upon exercise of stock options and participation in an at-the market equity offering program that we entered into on May 18, 2023 (the "ATM Program"). As of September 30, 2023, we had unrestricted cash and cash equivalents of $87.8 million and remaining capacity under our Revolving Credit Facility of $88.3 million.
Going Concern
The consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
As of September 30, 2023, there is $211.2 million outstanding on our Revolving Credit Facility and $202.1 million on our Term Loan Facility that mature in May 2025. The Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation considered the potential mitigating effect of management’s plans that have not been fully implemented. Management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company's plans include (A) amending the agreement for the Senior Secured Credit Facilities, which occurred on May 15, 2023 with the Fourth Amendment to Amended and Restated Credit Agreement, Waiver and First Amendment to Amended and Restated Collateral Agreement (the “Credit Agreement Amendment”), and (B) the execution of the capital raise requirement prescribed in the Credit Agreement Amendment, as further described below.
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While the Company executed the Credit Agreement Amendment and extended the maturity date on the Senior Secured Credit Facilities to May 15, 2025, the Credit Agreement Amendment also requires the Company maintain a minimum consolidated EBITDA through February 29, 2024 and to raise at least $75.0 million through the issuance of equity and/or unsecured indebtedness by April 30, 2024 and that we make quarterly principal payments on the Term Loan Facility of approximately $3.9 million commencing with the quarter ended June 30, 2023. As a result of these provisions, the Company has determined it is appropriate to continue to classify the debt as a current liability on the condensed consolidated balance sheets.
Debt Covenants
The Company has a senior secured credit facility that matures in May 2025 (the “Credit Facility”) which provides for (1) revolving credit commitments, (2) a term loan, and (3) the issuance of commercial letters of credit. As of September 30, 2023, we had $413.3 million outstanding under the Credit Facility. Under the Credit Facility, the Company is subject to a monthly minimum consolidated EBITDA covenant through February 29, 2024 and is also required to raise at least $75.0 million through the issuance of equity and/or unsecured indebtedness by April 30, 2024. As of September 30, 2023, we were in compliance with all of the covenants and restrictions associated with, and no events of default existed under, the Credit Facility. However, based on the timing of the USG procurement of the remaining 2023 order for CYFENDUSTM and a number of other product sales through the end of 2023, the Company anticipates that, absent a cure or waiver, it may be in breach of the minimum consolidated EBITDA covenant as early as the reporting date for the measurement period ending December 31, 2023. In the event the Company remains in compliance with the minimum consolidated EBITDA covenant through the measurement period ending December 31, 2023, the Company anticipates that, absent a cure or waiver of the minimum consolidated EBITDA covenant, it may be in breach of the minimum consolidated EBITDA covenant as early as the reporting date for the measurement period ending February 29, 2024. In addition, the Company is required to deliver audited annual financial statements without a “going concern” or like qualification or exception with respect to our financial statements for the year ended December 31, 2023 within 90- days of year end. The Credit Facility and the Company’s other debt facilities are described in more detail below in Note 10, “Debt” and in Note 9, “Debt” in Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
If the Company is not compliant with the covenants an event of default may occur under the Credit Facility and the agent and requisite lenders thereunder could take actions to exercise certain rights and remedies as described in the Credit Facility. Further, acceleration of the Credit Facility would result in a cross-default of the Company’s obligations under the 3.875% Senior Unsecured Notes due in 2028. If the Company would be unable to obtain a waiver or forbearance of such covenants or defaults, to successfully renegotiate the terms of the Credit Facility, or to cure the potential covenant breach or default, and the lenders enforced one or more of their rights upon default and/or the default resulted in a cross-default under certain other of the Company’s debt instruments, the Company would be unable to meet its obligations and could be forced into insolvency proceedings.
Based on the facts and circumstances described above, management cannot make the assumption that it is probable that these debt covenants will be met. As a result, the Company continues to evaluate a number of uncertain factors related to its assessment of its ability to satisfy the capital raise requirement, including its ability to comply with the terms and operating and financial covenants required by the Senior Secured Credit Facilities, other market conditions, economic conditions, particularly in the pharmaceutical and biotechnology industry, and disruptions or volatility caused by factors such as regional conflicts, inflation, and supply chain disruptions. The Company has engaged legal and financial advisors to assist with a comprehensive review of alternatives to enhance its capital structure, which may include taking steps to cure any potential defaults or seeking forbearance, waivers, further cost reductions or other alternatives to avoid an event of default.
The Company had $87.8 million of cash on hand at September 30, 2023. On January 9, 2023, the Company announced the January 2023 Plan, intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. The January 2023 Plan included a reduction of the Company’s current workforce by approximately 125 employees. These actions, in combination with other cost reduction initiatives, are expected to result in annualized savings of over $60.0 million when fully implemented. Additionally, on August 8, 2023, the Company announced the August 2023 Plan, intended to strengthen its core business and financial position by reducing investment in and de-emphasizing focus on its CDMO services business for future growth. The August 2023 Plan included a reduction of the Company's current workforce by approximately 400 employees. These actions, in combination with other cost reduction initiatives, are expected to result in annualized savings of over $100 million when fully implemented.
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At-the-Market Equity Offering Facility
We may, from time to time, sell up to $150.0 million aggregate gross sales price of shares of our common stock through Evercore Group L.L.C. and RBC Capital Markets, LLC, as sales agents, under the ATM Program that we entered into on May 18, 2023. There were no sales of our common stock under the ATM Program during the three months ended September 30, 2023. Between the adoption of the ATM Program and September 30, 2023, we sold 1.1 million shares of our common stock under the ATM Program for gross proceeds of $9.1 million, representing an average price of $8.22 per share. As of September 30, 2023, $140.9 million aggregate gross sales price of shares of our common stock remains available for issuance under the ATM Program. We intend to use proceeds obtained from the sale of shares under the ATM Program for general corporate purposes.
Cash Flows
The following table provides information regarding our cash flows for the nine months ended September 30, 2023 and 2022:
  Nine Months Ended September 30,
(in millions) 2023 2022
Net cash provided by (used in):
Operating activities $ (238.4) $ (126.9)
Investing activities 223.7  (335.9)
Financing activities (540.4) 128.1 
Effect of exchange rate changes on cash, cash equivalents and restricted cash 0.3  (0.6)
Net change in cash, cash equivalents and restricted cash $ (554.8) $ (335.3)
Operating Activities:
Net cash used in operating activities was $238.4 million for the nine months ended September 30, 2023 compared with $126.9 million for the nine months ended September 30, 2022. The increase of $111.5 million in net cash used in operating activities was primarily due to net loss excluding non-cash items of $121.6 million, which excludes impairment charges of long-lived assets and goodwill of $306.7 million and $218.2 million, respectively, coupled with negative working capital changes of $116.8 million, primarily due to increases in receivables, an accumulation of inventory and prepaid expenses, and an increase accrued expenses and other liabilities, partially offset by an increase in our accounts payable.
Investing Activities:
Net cash provided by investing activities was $223.7 million for the nine months ended September 30, 2023 compared with net cash used in investing activities of $335.9 million for the nine months ended September 30, 2022. The increase of $559.6 million in net cash provided by investing activities was primarily due to proceeds from the sale of the travel health business during the second quarter of 2023, offset by purchases of property, plant and equipment and milestone payments related to our prior asset acquisitions.
Financing Activities:
Net cash used in financing activities was $540.4 million for the nine months ended September 30, 2023 compared with net cash provided by financing activities of $128.1 million for the nine months ended September 30, 2022. The increase of $668.5 million in net cash used in financing activities was primarily due to principal payments on the Senior Secured Credit Facilities, partially offset by proceeds from the sale of stock through our ATM Program.
Debt
As of September 30, 2023, the Company has $866.3 million of fixed and variable rate debt with varying maturities. See Note 10, “Debt” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Form 10-Q for further discussion.
Uncertainties and Trends Affecting Funding Requirements
We expect to continue to fund our short-term and long-term anticipated operating expenses, capital expenditures and debt service requirements from the following sources:
•existing cash and cash equivalents;
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•net proceeds from the sale of our products and CDMO services;
•development contracts and grant funding;
•proceeds from the sale of our common stock through the ATM Program; and
•our Senior Secured Credit Facilities and any replacement or other lines of credit we may establish from time to time.
There are numerous risks and uncertainties associated with product sales and with the development and commercialization of our product candidates. We may seek additional external financing to provide additional financial flexibility. Our future capital requirements will depend on many factors, including (but not limited to):
•the level, timing and cost of product sales and CDMO services;
•the extent to which we acquire or invest in and integrate companies, businesses, products or technologies;
•the acquisition of new facilities and capital improvements to new or existing facilities;
•the payment obligations under our indebtedness;
•the scope, progress, results and costs of our development activities;
•our ability to obtain funding from collaborative partners, government entities and non-governmental organizations for our development programs; and
•the costs of commercialization activities, including product marketing, sales and distribution.
If our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity or debt offerings, bank loans, collaboration and licensing arrangements, cost reductions, assets sales or a combination of these options.
If we raise funds by issuing equity securities, including through the ATM Program, our stockholders may experience dilution. Public or bank debt financing, if available, may involve agreements that include covenants, like those contained in our 3.875% Senior Unsecured Notes due 2028 (the “Senior Unsecured Notes”) and the Senior Secured Credit Facilities, which could limit or restrict our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities, buying back shares or declaring dividends. If we raise funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us.
Economic conditions, including market volatility and adverse impacts on financial markets, may make it more difficult to obtain financing on attractive terms, or at all. Any new debt funding, if available, may be on terms less favorable to us than our Senior Secured Credit Facilities or the Senior Unsecured Notes. If financing is unavailable or lost, our business, operating results, financial condition and cash flows would be adversely affected, and we could be forced to delay, reduce the scope of or eliminate many of our planned activities.
Unused Credit Capacity
Available room under the Revolving Credit Facility as of September 30, 2023 and December 31, 2022 was:
(in millions) September 30, 2023 December 31, 2022
Total Capacity $ 300.0  $ 600.0 
Less:
Outstanding Letters of Credit 0.5  1.3 
Outstanding Indebtedness 211.2  598.0 
Unused Capacity $ 88.3  $ 0.7 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of additional risks arising from our operations, see “Item 1A-Risk Factors” of this Quarterly Report on Form 10-Q.
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Market risk
We have interest rate and foreign currency market risk. Because of the short-term maturities of our cash and cash equivalents, we believe that an increase in market rates would likely not have a significant impact on the realized value of our investments.
Interest rate risk
We have debt with a mix of fixed and variable rates of interest. We terminated our interest rate swaps in June 2023, and we are satisfied with the current fix-float mix of the Company's debt portfolio. Floating rate debt carries interest based generally on the eurocurrency rate, as defined in our senior secured credit agreement, as amended by the Credit Agreement Amendment, plus an applicable margin. Increases in interest rates could result in an increase in interest payments for our floating rate debt.
We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our operating results assuming various changes in market interest rates. A hypothetical increase of one percentage point in the eurocurrency rate as of September 30, 2023 would increase our interest expense by approximately $4.1 million annually.
Foreign currency exchange rate risk
We have exposure to foreign currency exchange rate fluctuations worldwide and primarily with respect to the Euro, Canadian dollar, Swiss franc and British pound. We manage our foreign currency exchange rate risk primarily by either entering into foreign currency hedging transactions or incurring operating expenses in the local currency in the countries in which we operate, to the extent practical. We currently do not hedge all of our foreign currency exchange exposure and the movement of foreign currency exchange rates could have an adverse or positive impact on our results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, with the participation of our interim chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our interim chief executive officer and chief financial officer concluded that, as of such date our disclosure controls and procedures were ineffective due to the material weakness in internal control over financial reporting described below.
Material Weakness in Internal Control Over Financial Reporting
Our management identified a material weakness related to the design of our controls associated with the review of the calculation of our state deferred tax assets and liabilities and the operating effectiveness of the controls associated with the review of the valuation allowance calculation.
In Management's Report on Internal Control Over Financial Reporting included in Amendment No. 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, management, including our interim chief executive officer and chief financial officer, concluded our internal control over financial reporting was not effective as of December 31, 2022. As this material weakness was identified during the three months ended September 30, 2023, management has concluded that we did not maintain effective internal control over financial reporting as of September 30, 2023 based on the criteria in Internal Control-Integrated Framework (2013 version) issued by COSO.
Remediation
As part of our commitment to strengthening our internal control over financial reporting, we are implementing remedial actions under the oversight of the Audit Committee of our board of directors to address these deficiencies, including:
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• Enhanced review and reconciliation procedures
• Additional training on the affected tax matters
We will continue to monitor the design and operating effectiveness of these and other processes, procedures and controls and make any further changes management determines appropriate.
Changes in internal control over financial reporting
Except for the material weakness described above, there have been no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 16, “Litigation” in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The occurrence of any of the following risks or of unknown risks and uncertainties may adversely affect our business, operating results and financial condition.
RISK FACTOR SUMMARY
There are a number of government contracting risks that could impact our business, financial condition, operating results and cash flows, including:
•Reduced demand for and/or funding for procurement of CYFENDUSTM and/or BioThrax® vaccines or ACAM2000® and discontinuation of funding of our other USG procurement and development contracts.
•Inability to secure follow-on product procurement contracts with the USG upon the expiration of any of our existing procurement contracts.
There are a number of manufacturing risks that could impact our business, financial condition, operating results and cash flows, including:
•Our inability to maintain quality and manufacturing compliance at our manufacturing facilities for our products and for product candidates for our CDMO customers.
•Disruption at, damage to or destruction of our development and/or manufacturing facilities may impede our ability to manufacture our products, as well as deliver our CDMO services.
•Our operations, including our use of hazardous materials, chemicals, bacteria and viruses expose us to significant potential liabilities.
There are a number of product development and commercialization risks that could impact our business, financial condition, operating results and cash flows, including:
•Clinical trials of product candidates are expensive and time-consuming, and their outcome is uncertain.
•We may fail to capitalize on the most scientifically, clinically or commercially promising or profitable product candidates.
There are a number of regulatory and compliance risks that could impact our business, financial condition, operating results and cash flows, including:
•Failure to comply with complex laws and regulations pertaining to government contracts and resources required for responding to related government inquiries.
•Conditions associated with approvals and ongoing regulation of products may limit how and the extent to which we manufacture and market them.
•Failure to comply with various health care laws could result in substantial penalties.
•Failure to comply with obligations under USG pricing programs may require reimbursement for underpayments and the payment of substantial penalties, sanctions and fines.
•The extent to which we may be able to lawfully offer to sell and sell unapproved products in many jurisdictions may be unclear or ambiguous and such activities may subject us to regulatory enforcement actions.
There are a number of competitive and political risks that could impact our business, financial condition, operating results and cash flows, including:
•Development and commercialization of pharmaceutical products are subject to evolving private and public sector competition.
•NARCAN® Nasal Spray is currently subject to generic and branded competition in the U.S. and may be subject to branded and generic competition in Canada. In addition, the success of NARCAN® Nasal Spray, including in over-the-counter form, is subject to commercial availability of the product and our ability to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community.
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•Biologic products may be affected by the approval and entry of follow-on biologics, or biosimilars in the United States and other jurisdictions.
There are a number of risks related to our intellectual property that could impact our business, financial condition, operating results and cash flows, including:
•Challenges in obtaining or maintaining intellectual property rights and defense or enforcement of such rights, including against current or potential infringers.
•Potential discrepancies or challenges with respect to licenses, including our failure to comply with obligations under such licenses.
•Potential loss of proprietary information and know-how, which carries the risk of reducing the value of our technology and products.
•Entry of competing generic drugs upon patent and/or regulatory expires or with patents no longer in force.
There are a number of risks related to reliance on third parties that could impact our business, financial condition, operating results and cash flows, including:
•The loss of sole-source suppliers or an increase in the price of inventory.
•If other parties do not perform as contractually required or as expected, we may not be able to obtain regulatory approval for or commercialize our product candidates.
There are a number of legal and reputational risks that could impact our business, financial condition, operating results and cash flows, including:
•Unfavorable results of legal proceedings and government investigations could adversely impact our business, financial condition and results of operations.
•Our work on PHTs has exposed us to criticism and may expose us to further criticism, from the media, government personnel and others, which could further harm our reputation, negatively affect our share price, operations and our ability to attract and retain talent.
•Cyber security incidents involving us, our business partners, collaborators or other third parties could harm our ability to operate our business effectively in light of our heightened risk profile.
•We could face product liability exposure associated with the use of our medical products. There can be no assurance that the SAFETY Act, Public Readiness and Emergency Preparedness Act (the "PREP Act"), or other liability protections will be sufficient to limit or avoid product liability, and defending such cases requires significant resources.
There are a number of financial risks that could impact our business, financial condition, operating results and cash flows, including:
•Our ability to maintain sufficient cash flow from our operations to pay our substantial debt, both now and in the future.
•Our ability to obtain additional funding and be able to raise capital when needed, including in order to be able to continue as a going concern.
•Our ability to comply with the covenants under our Revolving Credit Facility, Term Loan Facility, Senior Unsecured Notes and any other debt agreements to which we may be a party.
•Our ability to remediate a material weakness in our internal control over financial reporting and to prepare accurate financial statements in a timely manner.
There are a number of risks related to our strategic acquisitions, divestitures and collaborations that could impact our business, financial condition, operating results and cash flows, including:
•We may not be successful in identifying, structuring or acquiring businesses and products to drive our growth.
•Our failure to successfully integrate acquired businesses and/or assets into our operations and our ability to realize the benefits of such acquisitions.
•Our failure to realize the full benefits from the sale of our travel health business to Bavarian Nordic.

There are a number of risks associated with our common stock, including, but not limited to:
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•Our business or our share price could be negatively affected as a result of the actions of stockholders.
•The price of our common stock has been and remains subject to extreme volatility.
The risk factors below contain more detailed descriptions of the risks identified above, as well as additional risks that may materially harm our business, financial condition or results of cash flows.
GOVERNMENT CONTRACTING RISKS
We currently derive a substantial portion of our revenue from USG procurement of the CYFENDUSTM vaccine and the TEMBEXA®, oral antiviral and have historically derived a substantial portion of our revenue from USG procurement of the ACAM2000® vaccine and of BioThrax®. If the USG’s demand for and/or funding for procurement of CYFENDUSTM, BioThrax®, ACAM2000® and/or TEMBEXA® are substantially reduced, our business, financial condition, operating results and cash flows would be materially harmed.
We derive a substantial portion of our current and expected future revenues from USG procurement of CYFENDUSTM. As with any approved product, there is a risk that we may encounter challenges causing delays or an inability to deliver CYFENDUSTM, which may have a material effect on our ability to generate and recognize revenue.
The success of our business and our future operating results are significantly dependent on anticipated funding for the procurement of our anthrax vaccines and the terms of such procurement by the USG, including the price per dose, the number of doses and the timing of deliveries. We have no certainty that funding will be made available for the procurement of our anthrax vaccines. If priorities for the Strategic National Stockpile (“SNS”) change generally, or as a result of the conclusion of the USG’s audit of the SNS, or with respect to the level of procurement of our anthrax vaccines, funding to procure future doses of CYFENDUSTM or BioThrax® vaccines may be delayed, limited or not available, BARDA may never complete the anticipated full transition to stockpiling CYFENDUSTM in support of anthrax preparedness, and our future business, financial condition, operating results and cash flows could be materially harmed.
In addition, in the past we have derived a substantial portion of our revenues from sales of ACAM2000® vaccine to the USG. If priorities for the SNS change with respect to ACAM2000® vaccine or the USG decides not to exercise additional options under our ACAM2000® contract, our future business, financial condition, operating results and cash flows could be materially harmed.
Our USG procurement and development contracts require ongoing funding decisions by the USG. Any reduction or discontinuation of funding of any of these contracts could cause our business, financial condition, operating results and cash flows to suffer materially.
The USG is the principal customer for our MCMs and the primary source of funds for the development of most of our product candidates in our development pipeline. We anticipate that the USG will also be a principal customer for any MCMs that we successfully develop from within our existing product development pipeline, as well as those we acquire in the future. Additionally, a significant portion of our revenue comes from USG development contracts and grants. Over its lifetime, a USG procurement or development program, such as for CYFENDUSTM under our development and procurement contract with BARDA, may be implemented through the award of many different individual contracts and subcontracts. The funding for such government programs is subject to Congressional appropriations, generally made on a fiscal year basis, even for programs designed to continue for several years. These appropriations can be subject to a number of uncertainties, including political considerations, changes in priorities due to global pandemics, the results of elections and stringent budgetary constraints.
Additionally, our government-funded development contracts typically give the USG the right, exercisable in its sole discretion, to extend these contracts for successive option periods following a base period of performance. The value of the services to be performed during these option periods may constitute the majority of the total value of the underlying contract. On July 31, 2023, we were awarded a 10-year contract by BARDA for the advanced development, manufacturing scale-up, and procurement of EbangaTM (Ansuvimab-zykl) treatment for Ebola. The contract consists of a base period of performance with two option periods valued at approximately $121 million, and option periods for procurement of EbangaTM over five years valued at up to $583 million. If all option periods are exercised, the total contract value will be valued at up to approximately $704 million. If levels of government expenditures and authorizations for public health countermeasure preparedness decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the USG otherwise declines to exercise its options under this contract or our other existing contracts, our revenues would suffer, as well as our business, financial condition, operating results and cash flows.
There can be no assurance that we will be able to secure follow-on product procurement contracts with the USG upon the expiration of any of our existing procurement contracts.
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A significant portion of our revenue is substantially dependent upon product procurement contracts with the USG and foreign governments for our MCMs and other commercialized products. Upon the expiration of a procurement contract, we may not be able to negotiate a follow-on procurement contract for the particular product on similar terms. We intend to negotiate follow-on procurement contracts for most of our MCMs and other commercialized products upon the expiration of a related procurement contract, but there can be no assurance that we will be successful obtaining any follow-on contracts. Even if we are successful in negotiating a follow-on procurement contract, it may be for a lower product volume, over a shorter period of performance or be on less favorable pricing or other terms. An inability to secure follow-on procurement contracts for our approved products or product candidates could materially and adversely affect our revenues, and our business, financial condition, operating results and cash flows could be harmed.
The government contracting process is typically a competitive bidding process and involves unique risks and requirements.
Our business involves government contracts and grants, which may be awarded through competitive bidding. Competitive bidding for government contracts presents many risks and requirements, including:
•the possibility that we may be ineligible to respond to a request for proposal;
•the commitment of substantial time and attention of management and key employees to the preparation of bids and proposals;
•the need to accurately estimate the resources and cost structure that will be required to perform any contract that we might be awarded;
•the submission by third parties of protests to our responses to requests for proposal that could result in delays or withdrawals of those requests for proposal; and
•in the event our competitors protest or challenge contract or grant awards made to us through competitive bidding, the potential that we may incur expenses or delays, and that any such protest or challenge could result in the resubmission of bids based on modified specifications, or in the termination, reduction or modification of the awarded contract.
The USG may choose not to award us future contracts for either the development of our new product candidates or for the procurement of our existing MCM and other commercialized products and may instead award such contracts to our competitors. If we are unable to secure particular contracts, we may not be able to operate in the market for products that are provided under those contracts. Additionally, if we are unable to consistently win new contract awards over an extended period, or if we fail to anticipate all of the costs or resources that we will be required to secure and, if applicable, perform under such contract awards, our growth strategy and our business, financial condition and operating results and cash flows could be materially and adversely affected.
The amounts we are paid under our fixed price government procurement contracts are based on estimates we have made of the time, resources and expenses required for us to perform under those contracts. If our actual costs exceed our estimates, we may not be able to earn an adequate return or may incur a loss under these contracts, which could harm our operating results and materially reduce our net income.
Our current procurement contracts with the U.S. Department of Health & Human Services (“HHS”) and the U.S. Department of Defense (“DoD”) are generally fixed price contracts. We expect that any future procurement contracts we successfully secure with the USG would likely also be fixed price contracts. Under a fixed price contract, we are required to deliver our products at a fixed price regardless of the actual costs we incur. Estimating costs that are related to performance in accordance with contract specifications is difficult, particularly where the period of performance is over several years, and when factoring in higher levels of inflation. Our failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed price contract could reduce the profitability of such a contract or cause a loss, which could harm our operating results and materially reduce our net income.
Unfavorable provisions in government contracts, some of which may be customary, may subject our business to material limitations, restrictions and uncertainties and may have a material adverse impact on our business, financial condition, operating results and cash flows.
Government contracts customarily contain provisions that give the USG substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the USG to:
•terminate existing contracts, in whole or in part, for any reason;
•unilaterally reduce or modify contracts or subcontracts;
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•decline, in whole or in part, to exercise an option to purchase product under a procurement contract or to fund additional development under a development contract;
•decline to renew a procurement contract;
•claim certain rights to facilities or to products, including intellectual property, developed under the contract;
•require repayment of contract funds spent on construction of facilities in the event of contract default;
•take actions that result in a longer development timeline than expected;
•direct the course of a development program in a manner not chosen by the government contractor;
•suspend or debar the contractor from doing business with the government or a specific government agency;
•pursue civil or criminal remedies under acts such as the False Claims Act and False Statements Act; and
•control or prohibit the export of products.
Generally, government contracts contain provisions permitting unilateral termination or modification, in whole or in part, at the USG’s convenience. Under general principles of government contracting law, if the USG terminates a contract for convenience, the government contractor may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the USG terminates a contract for default, the government contractor is entitled to recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. All of our development and procurement contracts with the USG are terminable at their convenience with these potential consequences.
In addition, our USG contracts grant the USG the right to use technologies developed by us under the government contract or the right to share data related to our technologies, for or on behalf of the USG. Under our USG contracts, we may not be able to limit third parties, including our competitors, from accessing certain of these technology or data rights, including intellectual property, in providing products and services to the USG.
MANUFACTURING RISKS
An inability to maintain manufacturing compliance at our manufacturing facilities, which could adversely affect our business, financial condition, operating results and cash flows.
The FDA conducts periodic inspections of our manufacturing facilities for compliance with current cGMP requirements. The Company's failure to maintain compliance with cGMP requirements at our manufacturing facilities has hindered and could continue to hinder our ability to continue manufacturing for our own products and for CDMO customers, which could adversely affect our business, financial condition, operating results and cash flows. For example, in February 2022, the FDA inspected Emergent’s Camden facility and issued an FDA Form 483. In August 2022, the FDA issued a warning letter to Emergent related to the February 2022 inspection. The warning letter included issues pertaining to equipment cleaning and maintenance; aseptic sterilization technique and procedures; and quality systems. In October 2023, the FDA determined that the inspection classification of the Camden facility is "voluntary action indicated" which indicates that, although investigators found and documented objectionable conditions during the inspection, the FDA would not take or recommend regulatory or enforcement action because the objectionable conditions did not meet the threshold for action at that time. Furthermore, the FDA concluded that the Camden facility inspection was "closed" under 21 CFR 20.64(d)(3) and issued to the Company a "Warning Letter close-out letter".
Any failure to remedy the remaining objectionable conditions at the Camden facility, or any additional failures to maintain compliance with cGMP requirements at any of our manufacturing facilities, could adversely affect our business, financial condition, operating results and cash flows.
Disruption at, damage to or destruction of, our manufacturing facilities could impede our ability to manufacture anthrax vaccines, our ACAM2000® vaccine or our other products or product candidates, as well as impact the delivery of CDMO services, which would harm our business, financial condition, operating results and cash flows.
Any interruptions in our manufacturing operations could result in our inability to produce products and product candidates for delivery to satisfy the demands of our customers in a timely manner, which would reduce our revenues and materially harm our business, financial condition, operating results and cash flows. A number of factors could cause interruptions, including:
•equipment malfunctions or failures;
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•technology malfunctions;
•cyber-attacks;
•work stoppages or slowdowns;
•civil unrest and protests, including by animal rights activists;
•injunctions;
•damage to or destruction of our manufacturing equipment, or of one or more of our facilities;
•findings and recommendations of health authorities or qualified persons in connection with facility inspections;
•ongoing supply chain interruptions; and
•product contamination or tampering.
The factors listed above could cause disruptions at any of our manufacturing facilities. We do not have any redundant manufacturing facilities for any of our products. Accordingly, any damage to, or disruption or destruction of one or more of our facilities could impede our ability to manufacture our products, and our product candidates and our ability to provide manufacturing and development services for external customers, result in losses and delays, including delays in the performance of our contractual obligations or delays in our clinical trials, any of which could be costly to us and materially harm our business, financial condition, operating results and cash flows.
Providers of MCMs could be subject to an increased risk of terrorist activities. The USG has designated both our Lansing, Michigan and our Bayview bulk manufacturing facility in Baltimore, Maryland as facilities requiring additional security. Although we continually evaluate and update security measures, there can be no assurance that any additional security measures would protect these facilities from terrorist efforts determined to disrupt our manufacturing activities.
Problems may arise during the production of our products and product candidates, as well as those we produce for our CDMO customers, due to the complexity of the processes involved in their development, manufacturing and shipment or other factors. Significant delays in product manufacturing or development and our ability to ramp up production to meet the needs of our customers could cause delays in recognizing revenues, which would harm our business, financial condition, operating results and cash flows.
The majority of our products and product candidates are biologics. Manufacturing biologics, especially in large quantities, is complex. The products must be made consistently and in compliance with a clearly-defined manufacturing process. Problems during manufacturing may arise for a variety of reasons, including problems with raw materials, equipment malfunction and failure to follow specific protocols and procedures. Slight deviations anywhere in the manufacturing process, including obtaining materials, maintaining master seed or cell banks and preventing genetic drift, seed or cell growth, fermentation, contamination including from particulates among other things, filtration, filling, labeling, packaging, storage and shipping, potency and stability issues and other quality control testing, may result in lot failures or manufacturing shut-downs, delays in the release of lots, product recalls, spoilage or regulatory action. Such deviations may require us to revise manufacturing processes or change manufacturers. Additionally, as our equipment ages, it will need to be replaced, which has the potential to result in similar consequences. Success rates can also vary dramatically at different stages of the manufacturing process, which can reduce yields and increase costs. From time to time, we may experience deviations in the manufacturing process that may take significant time and resources to resolve and, if unresolved, may affect manufacturing output and could cause us to fail to satisfy customer orders or contractual commitments, lead to a termination of one or more of our contracts, lead to delays in our clinical trials, result in litigation, or other restrictions on the marketing or manufacturing of a product, any of which could be costly to us, damage our reputation and negatively impact our business. Regulatory action, including the issuance of FDA Form 483 and warning letters can also have an impact.
Additionally, if changes are made to the manufacturing process, we may be required to provide the FDA with pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of any impacted products before and after the changes.
We are contractually required to ship our biologic products at a prescribed temperature range and variations from that temperature range could result in loss of product and could significantly and adversely impact our revenues, which would harm our business, financial condition, operating results and cash flows.
In addition, we may not be able to ramp up our manufacturing processes to meet the rapidly changing demand or specifications of our customers on the desired timeframe, if at all. Our inability to ramp up manufacturing to meet the demand or specifications of our customers or the inability to timely obtain regulatory authorization to produce the products or product candidates of our customers could also harm our business, financial condition, operating results and cash flows.
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Our products and product candidates procured by the USG and other customers require us to perform tests for and meet certain potency and lot release standards prescribed by the FDA and other agencies, which may not be met on a timely basis or at all.
We are unable to sell any products and product candidates that fail to satisfy certain testing specifications. For example, we must provide the FDA with the results of certain tests, including potency tests, before certain lots are released for sale. Potency testing of each applicable lot is performed against qualified control lots that we maintain. We continually monitor the status of such reference lots for FDA compliance and periodically produce and qualify a new reference lot to replace the existing reference lot. If we are unable to satisfy USG requirements for the release of our products or product candidates, our ability to supply such products and product candidates to authorized buyers would be impaired until such time as we become able to meet such requirements, which could materially harm our future business, financial condition, operating results and cash flows.
Our operations, including our use of hazardous materials, chemicals, bacteria and viruses, require us to comply with regulatory requirements and expose us to significant potential liabilities.
Our operations involve the use of hazardous materials, including chemicals, bacteria and viruses, and may produce dangerous waste products. Accordingly, we, along with the third parties that conduct clinical trials and manufacture our products and product candidates on our behalf, are subject to federal, state, local and foreign laws and regulations that govern the use, manufacture, distribution, storage, handling, exposure, disposal and recordkeeping with respect to these materials. Under the Federal Select Agent Program, pursuant to the Public Health Security and Bioterrorism Preparedness and Response Act, we are required to register with and be inspected by the Centers for Disease Control and Prevention (the "CDC") and the Animal and Plant Health Inspection Service if we have in our possession, or if we use or transfer, select biological agents or toxins that could pose a threat to public health and safety, to animal or plant health or to animal or plant products. This legislation requires stringent safeguards and security measures for these select agents and toxins, including controlled access and the screening of entities and personnel and establishes a comprehensive national database of registered entities. We are also subject to a variety of environmental and occupational health and safety laws. Compliance with current or future laws and regulations in this area can require significant costs and we could be subject to substantial fines and penalties in the event of noncompliance. In addition, the risk of contamination or injury from these materials cannot be completely eliminated. In such event, we could be held liable for substantial civil damages or costs associated with the cleanup of hazardous materials. From time to time, we have been involved in remediation activities and may be so involved in the future. Any related cost or liability might not be fully covered by insurance, could exceed our resources and could have a material adverse effect on our business, financial condition, operating results and cash flows. In addition to complying with environmental and occupational health and safety laws, we must comply with special regulations relating to biosafety administered by the CDC, HHS, U.S. Department of Agriculture and the DoD, as well as regulatory authorities in Canada and Switzerland.
PRODUCT DEVELOPMENT AND COMMERCIALIZATION RISKS
The product candidates that we work on for our CDMO customers may not be safe or effective and even if they are, we may be unable to manufacture sufficient quantities to meet demand.
We provide CDMO services for the development and/or manufacture of various product candidates. There can be no assurance that these product candidates will be safe or effective or that they will be authorized for emergency use or approved by the FDA or any other health regulatory authority. Even if product candidates are found to be safe and/or effective and receive authorization or approval by a health regulatory authority or we receive authorization to produce drug substance or drug product at our facilities, the manufacturing processes for our CDMO programs are complex. There can be no assurance that we will be able to produce sufficient clinical or commercial quantities of any product candidate in a timely basis or at all. Difficulties manufacturing COVID-19 product candidates for certain CDMO customers and the November 2021 termination of the termination of the Center for Innovation in Advanced Development and Manufacturing agreement with BARDA for COVID-19 vaccine development and manufacturing caused us to suffer considerable reputational and financial damage and resulted in the instigation of stockholder litigation and government investigations described elsewhere in this Quarterly Report. Further, our announcement in the third quarter of 2023 that we are de-emphasizing focus on our CDMO business may raise concerns regarding our ability to fulfill manufacturing commitments to our CDMO customers. Any future failure to satisfy manufacturing commitments could adversely affect our reputation, subject us to potential legal liability and harm our business, financial condition, operating results and cash flows.
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Our growth depends on our success in developing and commercializing our product candidates. If we are unable to commercialize these product candidates or experience significant delays or unanticipated costs in doing so, our business would be materially and adversely affected.
We have invested significant efforts and financial resources in the development of our vaccines, therapeutics and medical device product candidates and the acquisition of additional product candidates. In addition to our product sales, our ability to generate revenue is dependent on a number of factors, including the success of our development programs, the USG's interest in providing development funding for or procuring certain of our product candidates, and the commercial viability of our acquired or developed product candidates. The commercial success of our product candidates can depend on many factors, including accomplishing the following in an economical manner:
•successful development, formulation and cGMP or Quality System Regulation ("QSR") scale-up of manufacturing that meets FDA and/or foreign regulatory requirements;
•successful program partnering;
•successful completion of clinical or non-clinical development;
•receipt of marketing approvals, clearances, or other authorizations from the FDA and equivalent foreign regulatory authorities;
•establishment of commercial manufacturing processes and product supply arrangements;
•training of a commercial sales force for the product;
•successful registration and maintenance of relevant patent and/or other proprietary protection;
•competitive pricing and market access; and
•acceptance of the product by potential government and other customers.
In particular, the success of NARCAN® Nasal Spray, including in over-the-counter form, is subject to commercial availability of the product and our ability to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community.
Clinical trials of product candidates are expensive and time-consuming, and their outcome is uncertain. We must invest substantial amounts of time and financial resources in these trials, which may not yield viable products. Failure to obtain regulatory approval for product candidates, particularly in the United States, could materially and adversely affect our financial resources, which would adversely affect our business, financial condition, operating results and cash flows.
Before obtaining regulatory approval or other authorization of our product candidates, we and our collaborative partners, where applicable, must conduct pre-clinical studies and clinical trials to establish proof of concept and demonstrate the safety and efficacy of our product candidates. Pre-clinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of such trials do not necessarily predict final results. An unexpected result in one or more of our clinical trials can occur at any stage of testing.
We may experience unforeseen events or issues during, or as a result of, pre-clinical testing, clinical trials or animal efficacy studies. These issues and events, which could delay or prevent our ability to receive regulatory approval for a product candidate, include, among others:
•our inability to manufacture sufficient quantities for use in trials;
•the unavailability or variability in the number and types of subjects for each study;
•safety issues or inconclusive or incomplete testing, trial or study results;
•drug immunogenicity;
•lack of efficacy of product candidates during trials;
•government or regulatory restrictions or delays; and
•greater than anticipated costs of trials.
Pre-clinical and clinical testing for certain of our MCM product candidates may face additional difficulties and uncertainties because they cannot ethically or feasibly be tested in human subjects. In the U.S. we expect to rely on the Animal Rule to obtain regulatory approval for some of our MCM product candidates.
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The Animal Rule permits, for certain limited diseases and circumstances, the use of animal efficacy studies, together with human clinical safety and immunogenicity trials, to support an application for marketing approval. For a product approved under the Animal Rule, certain additional post-marketing requirements apply. For example, to the extent feasible and ethical, applicants must conduct post-marketing clinical studies, such as field studies in the event of an outbreak or act of bioterrorism, to assess the drug's safety and effectiveness. It is possible that results from the animal efficacy studies used to support approval under the Animal Rule may not be predictive of the actual efficacy of our product candidates in humans.
Under the Public Health Service Act (the "PHSA") and the Federal Food, Drug, and Cosmetic Act (the "FDCA"), the Secretary of HHS can contract to purchase MCMs for the SNS prior to FDA approval, clearance, or other authorization of certain MCM product candidates. If the USG does not provide funding for and procure our MCM product candidates, they generally will have to be approved by the FDA through traditional regulatory mechanisms prior to sale and distribution in the United States.

We may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates.
We continue to evaluate our product development strategy and, as a result, may modify our strategy in the future. In this regard, we may, from time to time, focus our product development efforts on different product candidates or may delay or halt the development of various product candidates. We may change or refocus our existing product development, commercialization and manufacturing activities based on government funding decisions and other factors. This could require changes in our facilities and our personnel. Any product development changes that we implement may not be successful. In particular, we may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates or choose candidates for which government development funds are not available. Our decisions to allocate our R&D, management and financial resources toward particular product candidates or therapeutic areas may not lead to the development of viable commercial products and may divert resources from better business opportunities. Similarly, our decisions to delay or terminate product development programs could also cause us to miss valuable opportunities.
REGULATORY AND COMPLIANCE RISKS
There are a number of complex laws and regulations that pertain to government contracts and compliance with those laws and regulations require significant time and cost, which could have a material adverse effect on our business, financial condition, operating results and cash flows.
As a manufacturer and supplier of MCMs and other approved products to the USG addressing PHTs, we must comply with numerous laws and regulations relating to the procurement, formation, administration and performance of government contracts. These laws and regulations govern how we transact business with our government clients and, in some instances, impose additional costs and related obligations on our operations. For a detailed description of the most significant regulations that affect our government contracting business, see the prior discussion under “Regulation - Government Contracting.”
We may be subject to government investigations of compliance with government acquisition regulations. USG agencies routinely audit and investigate government contractors for compliance with applicable laws and standards. Even though we take significant precautions to identify, prevent and deter fraud, misconduct and non-compliance, we face the risk that our personnel or outside partners may engage in misconduct, fraud or improper activities. If we are audited or investigated and such audit or investigation were to uncover improper or illegal activities, we could be subject to civil and criminal fines and penalties, administrative sanctions, including suspension or debarment from government contracting, and suffer significant reputational harm. The loss of our status as an eligible government contractor or significant fines or penalties associated with contract non-compliance or resulting from investigations could have a material adverse effect on our business.
Our long-term success depends, in part, upon our ability to develop, receive regulatory approval for and commercialize product candidates we develop or acquire and, if we are not successful, our business, financial condition, operating results and cash flows may suffer.
Our product candidates and the activities associated with them are subject to extensive FDA regulation and oversight. This includes, but is not limited to, laws and regulations governing product development, product labeling, product testing, manufacturing, storage, product distribution, record keeping, and advertising and promotion. In limited circumstances, governments may have the authority to procure products that have not obtained regulatory approval to stockpile for emergency preparedness and to respond to public health emergencies. In other circumstances, failure to obtain regulatory approval for a product candidate will prevent us from selling and commercializing the product candidate.
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In the United States, to obtain authorization from the FDA to market and sell any of our future drug, biologic, or vaccine products, we will be required to submit a New Drug Application (an “NDA”) or Biologics License Application (a “BLA”) to the FDA. Under the FDCA, the PHSA, and the FDA’s implementation of those statutes, a company must support an NDA or BLA with substantial evidence that the product candidate is effective and evidence that the product is safe. Ordinarily, the FDA requires data from adequate and well-controlled clinical trials, including Phase 3 trials conducted in patients with the disease or condition being targeted, to demonstrate that a drug meets the statutory standards for approval. Once an NDA or BLA is submitted, the FDA has substantial discretion and may refuse to accept our application or may decide that our data are insufficient to support approval and require additional pre-clinical, clinical or other studies. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed, or to conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Likewise, the data in our device submissions may be insufficient to support approval, de novo classification or clearance where required, and we may not be able to demonstrate to the satisfaction of the FDA that our devices are safe or effective for their intended uses or, for a 510(k) device, that they are substantially equivalent to the predicate. Even if we are granted 510(k) clearances, de novo authorizations, or premarket approval application ("PMA") approvals, they may include significant limitations on the indications for use for the device.
Before we can market a new medical device, or an existing medical device for a new use, or make significant modifications to an existing product, we must first receive either clearance under Section 510(k) of the FDCA, de novo authorization, or approval of a PMA from the FDA, unless an exemption applies. These marketing submissions must also be supported by appropriate data, including in many cases clinical data. Likewise, changes to our combination products, including changes to the device constituent part, may also require a new submission to, and approval from, the FDA.
However, our MCM product candidates may be eligible for approval under the FDA's “Animal Rule,” under which findings from adequate and well controlled animal efficacy studies may serve as the basis of an approval when it is not feasible or ethical to conduct efficacy trials in humans. We cannot guarantee that the FDA will permit us to proceed with approval or licensure of any of our MCM product candidates under the Animal Rule. Even if we are able to proceed under the Animal Rule, product development can take a considerable amount of time, and the FDA may decide that our data are insufficient to support approval and require additional pre-clinical, clinical or other studies, refuse to approve our products, or place restrictions on our ability to commercialize those products. Furthermore, products approved under the Animal Rule are subject to certain additional post-marketing requirements. We cannot guarantee that we will be able to meet this regulatory requirement even if one or more of our product candidates are approved under the Animal Rule.
The process of obtaining these regulatory approvals is expensive, often takes many years if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidate involved. Changes in the regulatory approval process may cause delays in the approval or other marketing authorization, or rejection of an application. There is a high rate of failure inherent in the medical product development process, and product candidates that appear promising at early stages of development may fail for a number of reasons, and positive results from pre-clinical studies may not be predictive of similar results in human clinical trials. Similarly, promising results from earlier clinical trials of a product candidate may not be replicated in later clinical trials.
Failure to successfully develop future product candidates may materially adversely affect our business, financial condition, operating results and cash flows.
Unapproved and investigational stage products are also subject to the FDA's laws and regulations governing advertising and promotion, which prohibit the promotion of both unapproved products and unapproved uses of approved products. There is some risk that the FDA could conclude that our communications relating to unapproved products or unapproved uses of approved products constitute the promotion of an unapproved product or product use in violation of FDA laws and regulations. There is also a risk that a regulatory authority in another country could take a similar position under that country's laws and regulations and conclude that we have violated the laws and regulations related to product development, approval, or promotion in that country. If the FDA or any foreign regulatory authority determines that any of our communications constitute pre-approval promotion or promotion of an off-label use, the FDA could request that we modify our promotional materials, issue an untitled letter or warning letter, or subject us to regulatory or enforcement actions, including injunction, seizure, civil fine or criminal penalties.
Even if we or our collaborators obtain marketing approvals for our product candidates, the conditions of approvals and ongoing regulation of our products may limit how we manufacture, market and sell our products, which could materially impair our ability to generate revenue.
Once marketing authorization has been granted, we and our business partners will remain subject to ongoing regulatory oversight of our medical products, including with respect to labeling; safety surveillance and reporting; registration and listing requirements; cGMP and QSR requirements relating to manufacturing, quality control, quality assurance, and corresponding maintenance of records and documents; advertising and promotional activities; requirements regarding the distribution of samples to physicians and related recordkeeping; and medical device design, development and manufacturing.
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The FDA and other agencies, including the U.S. Department of Justice (“DOJ”) and the HHS Office of Inspector General (“OIG”), closely regulate and monitor the marketing and promotion of medical products to ensure that they are marketed in a manner consistent with the FDA-approved label. For drug products, we must promote the product in a manner consistent with the full prescribing information or, for 510(k) cleared devices, consistent with the cleared indication. The FDA, DOJ, and OIG impose stringent restrictions on manufacturers’ communications regarding unapproved/uncleared products and unapproved/uncleared uses of approved/cleared products. If we market unapproved/uncleared products or market our approved/cleared products for unapproved/uncleared indications, we may be subject to enforcement action. Violations of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription products may lead to investigations and enforcement actions alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.
Certain of our products are subject to post-marketing requirements (“PMRs”), which we are required to conduct, and post marketing commitments, which we have agreed to conduct. The FDA has the authority to take action against sponsors who fail to meet the obligations of a PMR, including civil monetary penalties and/or misbranding charges.
In addition, discovery of previously unknown adverse events or other problems with our products, manufacturing partners or manufacturing processes, or failure to comply with regulatory requirements, may result in various penalties and sanctions. For all FDA-regulated products, if the FDA finds that a manufacturer has failed to comply with applicable laws and regulations, or that a product is ineffective or poses an unreasonable health risk, it can institute or seek a wide variety of enforcement actions and other remedies, including but not limited to:
•restrictions on such products, manufacturers or manufacturing processes;
•restrictions on the labeling or marketing of a product;
•restrictions on distribution or use of a product;
•requirements to conduct post-marketing studies or clinical trials;
•warning letters or untitled letters;
•refusal to approve pending applications or supplements to approved applications that are submitted;
•delay in or refusal to approve, clear or authorize pending PMA applications, 510(k) premarket submissions, or de novo authorization requests;
•fines, restitution or disgorgement of profits or revenues;
•suspension or withdrawal of marketing approvals;
•refusal to permit the import or export of our products;
•product seizure; and
•injunctions or the imposition of civil or criminal penalties.
If we and our collaborators are not able to comply with post-approval regulatory requirements, we could have the marketing approvals for our products withdrawn by regulatory authorities and our ability to market and sell any products could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.
Any product candidate for which we or our collaborators obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to substantial penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.
Likewise, non-compliance with EU requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with the EU and other legal and regulatory requirements regarding the protection of personal information can also lead to significant penalties and sanctions. Non-compliance with similar requirements in other foreign jurisdictions can also result in enforcement actions and significant penalties.
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Current and future legislation may increase the difficulty and cost for us and any collaborators to obtain marketing approval of and commercialize our product candidates and may affect the prices we, or our collaborators, may obtain.
In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the health care system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval. We expect that current laws, as well as other health care reform measures that may be adopted in the future, may result in more rigorous coverage criteria and additional downward pressure on the price that we, or any collaborators, may receive for any approved products.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the "ACA"), passed in 2010 and substantially changed the way health care is financed by both governmental and private insurers, and significantly impacted the U.S. biopharmaceutical industry. However, some provisions of the ACA have yet to be fully implemented and certain provisions have been subject to legal and political challenges, as well as efforts by the last Presidential administration to repeal or replace certain aspects of the ACA. On January 28, 2021, however, the President issued an executive order to strengthen implementation of the ACA. Concurrently, Congress considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA, such as removing penalties as of January 1, 2019 for not complying with the ACA’s individual mandate to carry health insurance, delaying the implementation of certain ACA-mandated fees, and increasing the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, the current Presidential administration issued an executive order initiating a special enrollment period during 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare. It is unclear how healthcare reform measures enacted by Congress or implemented by the current Presidential administration or other challenges to the ACA, if any, will impact the ACA or our business.
Additionally, there has been recent heightened federal governmental scrutiny over the manner in which manufacturers set prices for their marketed products. For example, there have been several recent Congressional inquiries and has been proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products.
Further, the Inflation Reduction Act of 2022 (the “IRA”), was signed into law on August 16, 2022. While the IRA is still subject to rulemaking (with more information to come via guidance documents from the responsible federal agencies), the IRA, as written, will, among other changes, give HHS the ability and authority to directly negotiate with manufacturers the price that Medicare will pay for certain high-priced drugs. The IRA will also require manufacturers of certain Part B and Part D drugs to issue to HHS rebates based on certain calculations and triggers (i.e., when drug prices increase and outpace the rate of inflation). At this time, we cannot predict the implications the IRA provisions will have on our business. These types of laws may have a significant impact on our ability to set a product price we believe is fair and may adversely affect our ability to generate revenue and achieve or maintain profitability.
Additionally, in October 2020, HHS and the FDA published a final rule allowing states and other entities to develop a Section 804 Importation Program (“SIP”), to import certain prescription drugs from Canada into the United States. The final rule is currently the subject of ongoing litigation. At least six states (Vermont, Colorado, Florida, Maine, New Mexico, and New Hampshire) have passed laws allowing for the importation of drugs from Canada, and at least three states (Colorado, Florida, and New Mexico) have submitted SIPs to the FDA for review and approval.
At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. A number of states, for example, require drug manufacturers and other entities in the drug supply chain, including health carriers, pharmacy benefit managers, and wholesale distributors, to disclose information about pricing of pharmaceuticals. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal health care reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for health care products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
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If we fail to comply with foreign, federal, state and local health care laws, including fraud and abuse laws, health information privacy and security laws, and antitrust laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.
In the United States, certain of our products are reimbursed under federal and state health care programs such as Medicaid, Medicare, TriCare, and/or state pharmaceutical assistance programs. Many foreign countries have similar laws. Federal and state laws designed to prevent fraud and abuse under these programs prohibit pharmaceutical companies from offering valuable items or services to customers or potential customers to induce them to buy, prescribe, or recommend our product (the so-called “anti-kickback” laws). Exceptions are provided for discounts and certain other arrangements if specified requirements are met. Other federal and state laws, and similar foreign laws, not only prohibit us from submitting any false information to government reimbursement programs but also prohibit us, our employees, or any third party acting on our behalf from doing anything to cause, assist, or encourage our customers to submit false claims for payment to these programs. We are also subject to various federal, state and foreign antitrust and competition laws that prohibit certain activities that may have an impact against potential competitors. Violations of the various fraud and abuse and antitrust laws may result in severe penalties against the responsible employees and us, including jail sentences, large fines, and the exclusion of our products from reimbursement under federal and state programs. Some of the laws that may affect our ability to operate include:
•the federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer or pay remuneration, directly or indirectly, overtly or covertly, to induce, or in return for, either the referral of an individual, or the purchase, lease, prescribing or recommendation of an item, good, facility or service reimbursable by a federally funded health care program, such as the Medicare or Medicaid program. The term “remuneration” has been interpreted broadly and may constrain our marketing practices, educational programs, pricing policies and relationships with health care providers or other entities, among other activities;
•the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, false or fraudulent claims for payment by a federal health care program or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government, with potential liability, including mandatory treble damages and significant per-claim penalties.
•the U.S. federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any health care benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statement, in connection with the delivery of, or payment for, health care benefits, items or services. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
•HIPAA, as amended by HITECH, and their respective implementing regulations mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common health care transactions, as well as standards relating to the privacy, security and transmission of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. Among other things, HITECH makes HIPAA's security standards directly applicable to “business associates,” or independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity;
•the Physician Payments Sunshine Act and its implementing regulations require certain manufacturers of drugs, biologics, medical devices and medical supplies for which payment is available under Medicare, Medicaid or the Centers for Medicare & Medicaid Services ("CMS") to report certain payments and transfers of value made to U.S. physicians, other healthcare providers and teaching hospitals, and ownership or investment interests held by physicians, other healthcare providers and their immediate family members; and
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•state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; state, local and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, obtain pharmaceutical agent licensure, and/or otherwise restrict payments that may be made to health care providers and entities; and state, local and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to health care providers or entities, or marketing expenditures.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the federal Anti-Kickback Statute, it is possible that some of our business activities could be subject to challenges under one or more of such laws. Moreover, recent health care reform legislation has strengthened these laws. For example, the ACA, among other things, amends the intent requirement of the federal Anti-Kickback Statute and criminal health care fraud statutes, so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
If our operations are found to be in violation of any of the laws described above or otherwise, we may be subject to penalties, including civil and criminal penalties, damages, fines, individual imprisonment, integrity obligations, exclusion from funded health care programs and the curtailment or restructuring of our operations. Any such penalties could adversely affect our financial results. We continue to improve our corporate compliance program designed to ensure that our development, marketing, and sales of existing and future products and product candidates are in compliance with all applicable laws and regulations, but we cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
Efforts to ensure that our business arrangements with third parties comply with health care laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving fraud and abuse or other health care laws and regulations. If our operations are found to be in violation of any of these laws, we may be subject to significant civil, criminal and administrative penalties, damages, fines, individual imprisonment, integrity obligations, exclusion from government funded health care programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If a third party fails to comply with applicable laws and regulations while acting on our behalf, we may also be subject to criminal, civil, and administrative penalties, including those listed above.
The United States government, state governments and private payors regularly investigate the pricing and competitive practices of pharmaceutical companies and biotechnology companies, and many file actions alleging that inaccurate reporting of prices has improperly inflated reimbursement rates. We may also be subject to investigations related to our pricing practices. Regardless of merit or eventual outcome, these types of investigations and related litigation can result in:
•diversion of management time and attention;
•significant legal fees and payment of damages or penalties;
•limitations on our ability to continue certain operations;
•decreased product demand; and
•injury to our reputation.
Moreover, an adverse outcome, or the imposition of penalties or sanctions for failing to comply with applicable fraud and abuse and antitrust laws, could adversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
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If we fail to comply with our obligations under U.S. governmental pricing programs, we could be required to reimburse government programs for underpayments and could pay penalties, sanctions and fines.
The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid rebate program will continue to increase our costs and the complexity of compliance and will be time-consuming. Changes to the definition of average manufacturer price ("AMP"), and the Medicaid rebate amount under the ACA, the issuance of final regulations implementing those and other changes has affected and could further affect our 340B “ceiling price” calculations. Because we participate in the Medicaid rebate program, we are required to report average sales price ("ASP"), information to CMS for certain categories of drugs that are paid for under Part B of the Medicare program. Future statutory or regulatory changes or CMS binding guidance could affect the ASP calculations for our products and the resulting Medicare payment rate and could negatively impact our results of operations.
Pricing and rebate calculations vary among products and programs, involve complex calculations and are often subject to interpretation by us, governmental or regulatory agencies and the courts. The Medicaid rebate amount is computed each quarter based on our submission to CMS of our current AMP and “best price” for the quarter. If we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data for a period not to exceed twelve quarters from the quarter in which the data originally were due. Any such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on the direction of the revision. Such restatements and recalculations would increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Price recalculations also may affect the “ceiling price” at which we are required to offer our products to certain covered entities, such as safety-net providers, under the 340B/Public Health Service ("PHS") drug pricing program.
In addition, if we are found to have made a misrepresentation in the reporting of ASP, we are subject to civil monetary penalties for each such price misrepresentation and for each day in which such price misrepresentation was applied. If we are found to have knowingly submitted false AMP or “best price” information to the government, we may be liable for civil monetary penalties per item of false information. Any refusal of a request for information or knowing provision of false information in connection with an AMP survey verification would also subject us to civil monetary penalties. In addition, our failure to submit monthly/quarterly AMP or “best price” information on a timely basis could result in a civil monetary penalty per day for each day the information is late beyond the due date. Such failure could also be grounds for CMS to terminate our Medicaid drug rebate agreement, under which we participate in the Medicaid program. In the event that CMS terminates our rebate agreement, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot ensure that our submissions will not be found by CMS to be incomplete or incorrect.
In order for our products to be reimbursed by the primary federal governmental programs, we must report certain pricing data to the USG. Compliance with reporting and other requirements of these federal programs is a pre-condition to: (i) the availability of federal funds to pay for our products under Medicaid and Medicare Part B; and (ii) procurement of our products by the Department of Veterans Affairs ("DVA"), and by covered entities under the 340B/PHS program. The pricing data reported are used as the basis for establishing Federal Supply Schedule ("FSS"), and 340B/PHS program contract pricing and payment and rebate rates under the Medicare Part B and Medicaid programs, respectively. Pharmaceutical companies have been prosecuted under federal and state false claims laws for submitting inaccurate and/or incomplete pricing information to the government that resulted in increased payments made by these programs. Although we maintain and follow strict procedures to ensure the maximum possible integrity for our federal pricing calculations, the process for making the required calculations is complex, involves some subjective judgments and the risk of errors always exists, which creates the potential for exposure under the false claims laws. If we become subject to investigations or other inquiries concerning our compliance with price reporting laws and regulations, and our methodologies for calculating federal prices are found to include flaws or to have been incorrectly applied, we could be required to pay or be subject to additional reimbursements, penalties, sanctions or fines, which could have a material adverse effect on our business, financial condition and results of operations.
To be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal agencies and grantees, we also must participate in the DVA FSS pricing program. To participate, we are required to enter into an FSS contract with the DVA, under which we must make our innovator “covered drugs” available to the “Big Four” federal agencies—the DVA, the DoD, the PHS (including the Indian Health Service), and the Coast Guard—at pricing that is capped under a statutory federal ceiling price ("FCP") formula set forth in Section 603 of the Veterans Health Care Act of 1992 (the "VHCA"). The FCP is based on a weighted average wholesale price known as the Non-Federal Average Manufacturer Price ("Non-FAMP"), which manufacturers are required to report on a quarterly and annual basis to the DVA. Under the VHCA, knowingly providing false information in connection with a Non-FAMP filing can subject us to significant penalties for each item of false information.
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If we overcharge the government in connection with our FSS contract or Section 703 Agreement, whether due to a misstated FCP or otherwise, we are required to disclose the error and refund the difference to the government. The failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, can be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
From time to time, we sell unapproved MCMs to government entities under certain circumstances. While this is permissible in some cases, the extent to which we may be able to lawfully offer to sell and sell unapproved products in many jurisdictions may be unclear or ambiguous. Such sales could subject us to regulatory enforcement action, product liability and reputational risk.
Under certain and narrow circumstances, MCMs may be procured by government entities prior to approval by the FDA or other regulatory authorities, a practice which we follow in connection with certain MCMs, including TROBIGARD® (and CYFENDUSTM, prior to its approval by the FDA) in the United States. In the United States, the Secretary of HHS has the authority to contract to purchase MCMs for the SNS prior to FDA approval of the relevant MCM in specified circumstances. The FDA also has the authority to permit the emergency use of medical products that have not yet been approved by the FDA under an EUA. An EUA terminates when the EUA is revoked or the emergency declaration underlying the EUA terminates. An EUA is not a long-term alternative to obtaining FDA approval, licensure, clearance, or other marketing authorization for a product. An EUA has not been granted for TROBIGARD®. Absent an applicable exception, our MCM product candidates generally will have to be approved, licensed, or cleared by the FDA or other regulatory authorities in the relevant country through traditional pathways before we can sell those products to governments. Additionally, the laws in certain jurisdictions regarding the ability of government entities to purchase unapproved product candidates can be ambiguous, and the permissibility of exporting unapproved products from the United States and importing them to foreign countries may be unclear in some instances. Nevertheless, government bodies, such as U.S. federal entities other than HHS, state and local governments within the United States, and foreign governments have sought and may further seek to procure our MCM product candidates that are not yet approved. In this situation, we would expect to assess the permissibility and liability implications of supplying our product candidates to such entities on a case-by-case basis, which presents certain challenges, both in the case of U.S. and foreign governments, and particularly under emergency conditions. In addition, agencies or branches of one country’s government may take different positions regarding the permissibility of such sales than another country’s government or even other agencies or branches of the same government. If local enforcement authorities disagree with our conclusion that such activities are permissible, they may take enforcement action against us.
In addition, the sale of unapproved products also could give rise to product liability claims for which we may not be able to obtain adequate indemnification or insurance coverage. For example, despite liability protections applicable to claims arising under U.S. law and resulting from the use of certain unlicensed or unauthorized MCMs, such as a declaration issued under the PREP Act, plaintiffs still may bring lawsuits alleging, among other things, that their claims are not barred under the PREP Act.
In the event that a user of one or more of our products experiences an adverse event, we may be subject to additional reputational risk if the product has not been approved by the FDA or the corresponding regulatory authority of another country, particularly because we will not have approved labeling regarding the safety or efficacy of those products. In addition, legislatures and other governmental bodies that have oversight responsibility for procuring agencies may raise concerns after the fact, even if procurement was permissible at the time, which could result in negative publicity, reputational risk and harm to our business prospects.
There is also a risk that our communications with governments about our unapproved/uncleared products, such as in the procurement context, could be considered promotion of an unapproved/uncleared product or unapproved/uncleared use of an approved product. Therefore, there is a risk that we could be subject to enforcement actions if found to be in violation of such laws or regulations.
Even after regulatory approval is received, if we fail to comply with regulatory requirements, or if we experience unanticipated problems with our approved products, they could be subject to restrictions, penalties or withdrawal from the market.
Any vaccine, therapeutic product or medical device for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to the continual requirements of and review by the FDA and other regulatory bodies. Our approved products are subject to these requirements and ongoing review. For drugs and vaccines, these requirements include submissions of safety and other post-marketing information and reports, plasma donor testing, registration requirements, cGMP, requirements relating to potency and stability, quality control, quality assurance, restrictions on advertising and promotion, import and export restrictions and recordkeeping requirements.
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Requirements for medical devices are similar and include QSR compliance, establishment registration and device listing; record keeping; restrictions on advertising and promotion; post-market surveillance, and restrictions on import and export. In addition, various state laws require that companies that manufacture and/or distribute drug products within the state obtain and maintain a manufacturer or distributor license, as appropriate. Some states have similar requirements for devices. Because of the breadth of these laws, it is possible that some of our business activities could be subject to challenge under one or more of such laws.
Government regulators enforce cGMP, QSR, and other requirements through periodic unannounced inspections of manufacturing facilities. The FDA is authorized to inspect domestic and foreign manufacturing facilities without prior notice at reasonable times and in a reasonable manner. Health Canada may conduct similar inspections of our domestic and foreign facilities where products offered and sold in Canada are produced, or related formulation and filling operations are conducted. The FDA, Health Canada, and other foreign regulatory agencies conduct periodic inspections of our facilities. Following several of these inspections, regulatory authorities have issued inspectional observations, some of which were significant, but all of which are being, or have been, addressed through corrective actions. If, in connection with any future inspection, regulatory authorities find that we are not in substantial compliance with all applicable requirements, or if they are not satisfied with the corrective actions we take, our regulators may undertake enforcement action against us, which may include:
•warning letters, untitled letters, and other communications;
•product seizure or withdrawal of the product from the market;
•restrictions on the marketing or manufacturing of a product;
•suspension or withdrawal of regulatory approvals or refusal to approve pending applications or other marketing submissions, or supplements to approved applications;
•fines or disgorgement of profits or revenue; and
•injunctions or the imposition of civil or criminal penalties.
Similar action may be taken against us should we fail to comply with regulatory requirements, or later discover previously unknown problems with our products or manufacturing processes. For instance, our products are tested regularly to determine if they satisfy potency and stability requirements for their required shelf lives. Failure to meet potency, stability or other specification requirements could result in delays in distributions, recalls or other consequences. In November 2022, a specific batch of our RSDL® kits was recalled due to leakage, which could cause the product not to perform as effectively as intended. We identified and remediated the cause leading to the November 2022 recall, as well as completed all required actions, notices and report submissions related to the recalled batch. We are currently awaiting formal closure of the recall.
Even if regulatory approval, clearance, or other marketing authorization of a product is granted, the approval, clearance, or marketing authorization may be subject to limitations on the indicated uses for which the product may be marketed or sold or to the conditions of approval. Regulatory approval or other authorization may also contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. If we experience any of these post-approval events, our business, financial condition, operating results and cash flows could be materially and adversely affected.
Additionally, companies may not promote unapproved products or unapproved uses of approved products (i.e. “off-label” uses or uses that are not described in the product’s approved labeling and/or that differ from the uses approved or cleared by the applicable regulatory agencies). A company that is found to have improperly promoted an unapproved/uncleared product or an unapproved/uncleared use of an approved/cleared product may be subject to significant liability, including civil and administrative remedies (such as entering into corporate integrity agreements with the USG), as well as criminal sanctions. If our employees or agents engage in marketing of an unapproved/uncleared product or the unapproved/uncleared use of an approved/cleared product, we could be subject to civil or criminal investigations and monetary and injunctive penalties, which could adversely impact our ability to conduct business in certain markets, negatively affect our business, financial condition, operating results and cash flows, and damage our reputation.
Failure to obtain or maintain regulatory approval in international jurisdictions could prevent us from marketing our products abroad and could limit the growth of our business.
We currently sell certain of our products outside the United States and intend to expand the countries in which we sell our products and have received market authorization under the mutual recognition procedure to sell BioThrax® in France, Italy, the Netherlands, Poland, and the United Kingdom. To market or sell our products in foreign jurisdictions under normal circumstances, we generally need to obtain separate regulatory approvals and comply with numerous and varying requirements or use alternative “emergency use” or other exemptions from general approval and import requirements. Approval by the FDA in the United States or the mutual recognition procedure in the European member states does not ensure approval by all foreign regulatory authorities.
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The approval procedures in foreign jurisdictions can vary widely and can involve additional clinical trials and data review beyond that required by the FDA or under the mutual recognition procedure. There is also a risk that a regulatory authority in another country could conclude that we have violated the rules and regulations related to product development, approval or promotion in that country. Therefore, there is a risk that we could be subject to a foreign enforcement action if found to be in violation of such laws and regulations. We and our collaborators may not be able to obtain foreign regulatory approvals on a timely basis, if at all, and we may be unable to successfully commercialize our products in desired jurisdictions internationally if no alternate procurement pathway is identified for authorized government customers in a particular jurisdiction. We have limited experience in preparing, filing and prosecuting the applications necessary to gain foreign regulatory approvals and expect to rely on third-party contract research organizations and consultants to assist us in this process. Our reliance on third parties can introduce additional uncertainty into the process.
As of January 1, 2021, the Medicines and Healthcare products Regulatory Agency (the "MHRA"), became responsible for supervising medicines and medical devices in Great Britain, comprising England, Scotland and Wales under domestic law, whereas Northern Ireland continues to be subject to European Union rules under the Northern Ireland Protocol. The MHRA relies on the Human Medicines Regulations 2012 (SI 2012/1916) (as amended) (the "HMR"), as the basis for regulating medicines. The HMR has incorporated into the domestic law of the body of European Union law instruments governing medicinal products that pre-existed prior to the United Kingdom's withdrawal from the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, may force us to restrict or delay efforts to seek regulatory approval in the United Kingdom for our product candidates, which could significantly and materially harm our business.
Laws and regulations governing international operations may preclude us from developing, manufacturing and selling certain products outside of the United States, require us to develop and implement costly compliance programs, and if violated, can lead to financial and other impacts.
As we continue to expand our commercialization activities outside of the United States, we are subject to an increased risk of violating, and must dedicate additional resources towards avoiding inadvertently conducting activities in a manner that violates, the U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act, Canada's Corruption of Foreign Public Officials Act, and other similar foreign anti-bribery laws that prohibit corporations and individuals from corruptly paying, offering to pay, or authorizing the payment of anything of value, directly or indirectly, to any foreign government official, government staff member, political party or party official, or political candidate in an attempt to influence a person working in an official capacity or otherwise obtain an improper advantage. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the Company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Some anti-bribery laws also apply to private sector bribery. Compliance with the FCPA and other anti-bribery laws is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals and other parts of the health system are operated by the government, and doctors, hospital employees, and other health care providers are considered foreign officials. Certain payments to hospital employees and other health care professionals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.
Many countries, including the United States, also have various lobbying laws and regulations governing the conduct of individuals and companies who interact with government officials. These laws and regulations typically include certain restrictions and disclosure obligations. If we, our employees, or third parties acting on our behalf do not comply with these laws and regulations, we may be subject to civil and criminal penalties.
Many countries, including the United States, restrict the export or import of products to or from certain countries through, for example, bans, sanction programs, and boycotts. Such restrictions may preclude us from supplying products in certain countries, which could limit our growth potential. Furthermore, if we, or third parties acting on our behalf, do not comply with these restrictions, we may be subject to civil and criminal penalties.
Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If we continue to expand our presence outside of the United States, it will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the United States, which could limit our growth potential and increase our development costs.
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The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties, suspension or debarment from government contracting, and other sanctions, and can cause reputational harm. The SEC also may bring enforcement actions against issuers for violations of the FCPA’s accounting provisions.
COMPETITIVE AND POLITICAL RISKS
Development and commercialization of pharmaceutical products, including for PHT preparedness, are routinely subject to evolving private and public sector competition.
The development and commercialization of new biopharmaceutical and medical technology products is highly competitive and subject to rapid technological advances. We will continue to face future competition from other companies and governments, universities and other non-profit research organizations in respect to our products, any products that we acquire, our current product candidates and any products we may seek to develop or commercialize in the future. The market for products can be subject to development of safer, more effective, more convenient or less costly products. The market for current products can also depend on what resources can be devoted to marketing or selling products, or how companies are positioned to adapt more quickly to new technologies, respond to scientific advances or patient preferences and needs, initiate or withstand substantial price competition and/or procure third-party licensing and collaborative arrangements.
There are a number of companies with products or product candidates addressing PHT preparedness that are competing with us for both USG procurement and development resources. Factors to consider include competitors' financial, technical, marketing and selling resources as well as potential leverage that their intellectual property estates may offer.
Any reduction in demand for our products or reduction or loss of development funding for our products or product candidates in favor of a competing product could lead to a loss of market share for our products and cause reduced revenues, margins and levels of profitability for us, which could adversely affect our business, financial condition, operating results and cash flows.
Our biologic products may face risks of competition from biosimilar manufacturers.
Biological products and product candidates, which we refer to as “Biologic Products,” can be affected by the approval and entry of “biosimilars” in the United States and other jurisdictions. Biosimilar products are licensed through an abbreviated pathway based on a showing that they are “highly similar” to a previously licensed product (known as the reference product) notwithstanding minor differences in clinically inactive components, and there are no clinically meaningful differences from the reference product in terms of safety, purity, and potency. Biologic Products in our current pipeline include CYFENDUSTM, BioThrax®, and ACAM2000®. If a biosimilar version of one of our Biologic Products were approved, it could have a material adverse effect on the sales and gross profits of the affected Biologic Product and could adversely affect our business, financial condition, operating results and cash flows.
NARCAN® (naloxone HCl) Nasal Spray is currently subject to generic and branded competition and may be subject to additional generic and branded competition in the future. If demand for over-the-counter NARCAN® Nasal Spray outpaces current estimations, there could be supply challenges to meet demand.
NARCAN® Nasal Spray was approved as an over-the-counter (“OTC”) medication on March 29, 2023. The new OTC product was shipped out to retailers and e-commerce providers nationwide in August of 2023. Emergent is prepared to supply all segments/customers of the business with OTC product. If demand for NARCAN Nasal Spray increases beyond our current estimates, there could be supply interruptions. Should this occur, Emergent has contingency plans to continue to provide product to those at the highest need and increase production to meet the new demand.
NARCAN® Nasal Spray currently faces generic competition. In 2016, Teva Pharmaceuticals Industries Limited and Teva Pharmaceuticals USA (collectively, “Teva”) filed an Abbreviated New Drug Application (an “ANDA”) seeking regulatory approval to market a generic version of NARCAN®. In patent litigation related to Teva’s ANDA filing, a trial court decided in favor of Teva, and this decision was subsequently affirmed by the Court of Appeals for the Federal Circuit. The FDA approved Teva's ANDA on April 19, 2019. On December 22, 2021, Teva commenced the launch of its generic naloxone nasal spray. As part of state settlements, including in Florida, Texas, Rhode Island, and West Virginia, Teva has agreed to supply Medication- Assisted Treatment (“MAT”) and generic opioid overdose reversal agents, like naloxone, to states at no cost in lieu of additional monetary compensation. The terms of these product donation agreements stretch 10 to 15 years. Currently, the Teva product remains Rx-only but may be switched to OTC which could provide increased competition for NARCAN® Nasal Spray . NARCAN® also faces generic competition from Padagis LLC (“Padagis”). Prior to Padagis' separation from Perrigo UK FINCO Limited Partnership (“Perrigo”) in 2021, Perrigo filed its own ANDA for generic naloxone nasal spray in 2018. Emergent settled with Perrigo on February 12, 2020 providing for a license effective upon the Teva litigation decision. In June 2022, the FDA approved the ANDA and Padagis launched its prescription generic naloxone nasal spray. On July 18, 2023 the FDA approved an Rx-to-OTC switch of Padagis' product.
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In March 2023, Amneal Pharmaceuticals, Inc. announced that the FDA had accepted for review Amneal’s ANDA for generic naloxone nasal spray.
Sales of generic versions of NARCAN® Nasal Spray at prices lower than our branded product or provided at no cost by Teva, Padagis and Amneal (pending approval) have the potential to erode our sales and could impact our product revenue related to NARCAN® Nasal Spray.
NARCAN® Nasal Spray also faces branded competition from RiViveTM (naloxene HCl nasal spray 3mg), a branded product developed by Harm Reduction Therapeutics; Kloxxado™ (naloxone HCl nasal spray 8mg), a branded product developed by Hikma Pharmaceuticals, Inc.; Amphastar Pharmaceuticals, Inc.'s naloxone injection product; Teleflex Medical Inc.'s Intranasal Mucosal Atomization Device and Zimhi™ (naloxone), a branded injectable product developed by Adamis Pharmaceuticals Corporation.
NARCAN® may also face additional generic and branded competition in the future.
Political or social factors may delay or impair our ability to market and sell our products and may require us to spend significant management time and financial resources to address these issues.
Products developed to counter the potential impact of PHTs are subject to changing political and social environments. The political responses and social awareness of the risks of these threats on military personnel or civilians and the level of emphasis placed on such risks by the USG may vary over time. If the threat of terrorism were to decline, then the public perception of the risk on public health and safety may be reduced. This perception, as well as political or social pressures (including as a result of negative publicity we have received based on our longstanding ties to the USG), could delay or cause resistance to bringing our products in development to market or limit pricing or purchases of our products, any of which could negatively affect our revenues and our business, financial condition, operating results and cash flows.
In addition, substantial delays or cancellations of purchases could result from protests or challenges from third parties. Lawsuits brought against us by third parties or activists, even if not successful, could require us to spend significant management time and financial resources defending the related litigation and could potentially damage the public's perception of us and our products. Any publicity campaigns or other negative publicity may adversely affect the degree of market acceptance of our MCMs and thereby limit the demand for our products, which would adversely affect our business, financial condition, operating results and cash flows.
We may not be able to obtain orphan drug exclusivity for product candidates we may develop, and even if we do, that exclusivity may not prevent the FDA or foreign regulatory authorities from approving other competing products.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug or biologic intended to treat a rare disease or condition. Generally, if a product candidate with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA from approving another marketing application for the same drug for the same rare disease or condition for that time period. The applicable period is seven years in the United States.
In order for the FDA to grant orphan drug designation to one of our products, the agency must find, among other requirements, that the product is being or will be investigated for a condition or disease with a patient population of fewer than 200,000 individuals in the United States, or, for a vaccine, diagnostic drug, or preventive drug, it will be administered to fewer than 200,000 persons per year in the United States. Alternatively, the FDA may determine that there is no reasonable expectation that the costs of research and development of the drug can be recovered from sales of the drug in the United States. The FDA may conclude that the condition or disease for which we seek orphan drug designation does not meet this standard. Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different products can be approved for the same condition. In addition, even after a product receives orphan drug exclusivity, the FDA can subsequently approve the same product for the same condition if the FDA or such authorities conclude that the later product is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care; if the FDA determines that the holder of orphan drug exclusivity cannot ensure the availability of sufficient quantities of the product to meet the needs of patients with the rare disease or condition; or if the holder of orphan drug exclusivity consents to the approval of such subsequent product. Additionally, the FDA may revoke orphan drug designation if the FDA determines that the request for designation contained an untrue statement of material fact, omitted material information, or the FDA subsequently finds that the drug in fact had not been eligible for orphan drug designation at the time of submission of the request for designation.
We face similar risks in the EU and other foreign jurisdictions that have comparable regulations concerning orphan drug exclusivity.
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INTELLECTUAL PROPERTY RISKS
Protection of our intellectual property rights is an important tool for sustaining our business and the failure to do so could impact our financial condition, operating results, and cash flows.
We actively seek to protect intellectual property rights related to our Company's assets, including patent rights, trademark rights, trade secrets and proprietary confidential information, through defense and enforcement of existing rights and pursuit of protection on new and arising innovations.
Obtaining, maintaining and defending our intellectual property rights in the United States and other countries remains a critical component of the development and commercialization of our Company's assets.
Some of the risks associated with procurement, maintenance and enforcement of intellectual property rights include changes in patent laws or administrative patent office rules, evolving criteria and eligibility of obtaining patent protection on particular subject matter, the validity and enforceability of our intellectual property rights, the potential scope of coverage of our intellectual property rights, and/or the availability or strength of legal remedies in a particular country to defend and enforce intellectual property rights.
Other risks include associated costs, such as costs of patent prosecution and maintenance and costs associated with post-grant challenges. For example, such costs include inter partes review proceedings in the United States and oppositions in Europe, as well as costs associated with litigating and enforcing patent and trademark rights.
Additional risks include limitations on our extent or ability to procure, maintain or defend intellectual property rights associated with in-licensed or acquired intellectual property, where, for example, other parties (e.g., licensors) may have the first right to maintain or defend intellectual property rights in which we have an interest, or may pursue strategies that are divergent to the interest of our Company.
Third-party claims of for patent infringement could impact our business, financial condition, operating results, and cash flows.
Claims by other parties of alleged patent infringement could delay, stop or affect the development and commercialization of our products and product candidates. Such challenges, while ongoing, could be costly, requiring and utilizing company resources. Such challenges, if successful, may impact marketing or launch of products, or require ongoing license and/or royalty fees associated with potential settlement agreements. These challenges may have the potential to materially harm our business, financial condition, operating results, and cash flows.
Intellectual property licenses with third parties carry risks of challenges, which may be costly and time consuming and could impact the commercialization of our products.
We are a party to a number of license agreements and expect to enter into additional license agreements in the future. Such license agreements or collaboration arrangements can be subject to challenges if interests or expectations under such license agreements diverge. Such challenges may be costly, risk time and resources, and could delay or impact development, commercialization or launch of our products.
Potential loss of proprietary information and know-how generally carries the risk of reducing the value of our technology and products.
We also rely upon unpatented proprietary technology, processes, and know-how, particularly as to our proprietary manufacturing processes. These types of confidential information and trade secrets can be difficult to protect. We seek to protect this confidential information, in part, through agreements with our employees, consultants, and third parties, as well as confidentiality policies and audits, although these may not always be successful in protecting our trade secrets and confidential information.
One or more of our products could be subject to early competition from generic drugs and biosimilars.
Certain of our products are approved as drug products under the provisions of the FDCA, which may render it susceptible to potential competition from generic manufacturers via the Hatch-Waxman Act and ANDA process. Other of our products may be susceptible to challenges by entry of biosimilars through the route established under the Biologics Price Competition and Innovation Action of 2009.
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Although we intend to vigorously enforce our intellectual property rights, there can be no assurance that we will prevail in our enforcement or defense of our patent rights. Our existing patents could be invalidated, found unenforceable, or found not to cover a generic form of our product.
RISKS RELATED TO RELIANCE ON OTHER PARTIES
The loss of any of our non-exclusive, sole-source or single source suppliers, a shortage of related supplies or an increase in the price of inventory supplied to us could have an adverse effect on our business, financial condition and results of operations.
We purchase certain supplies used in our manufacturing processes from non-exclusive, or single sources due to quality considerations, costs or constraints resulting from regulatory requirements. We depend on certain single-source suppliers for key materials and services necessary to manufacture the majority of our products and certain product candidates. For example, we rely on a single-source supplier to provide us with Alhydrogel in sufficient quantities to meet our needs to manufacture CYFENDUSTM and BioThrax® vaccines and the specialty plasma in our hyperimmune specialty plasma products and certain ingredients for the ACAM2000® vaccine. We also rely on single-source suppliers for the materials necessary to produce NARCAN®, such as the naloxone active pharmaceutical ingredient and other excipients, along with the vial, stopper and device.
Where a particular single-source supply relationship is terminated, we may not be able to establish additional or replacement suppliers for certain components or materials quickly. This is largely due to the FDA approval system, which mandates validation of materials prior to use in our products and product candidates, and the complex nature of manufacturing processes. In addition, we may lose a sole-source supplier due to, among other things, the acquisition of a supplier by a competitor (which may cause the supplier to stop selling its products to us) or the bankruptcy of such a supplier, which may cause the supplier to cease operations. Any reduction or interruption by a sole-source supplier of the supply of materials or key components used in the manufacturing of our products or product candidates, a reduction in quality or an increase in the price of those materials or components could adversely affect us. If we are unable to locate or establish alternative suppliers, our ability to manufacture our products and product candidates could be adversely affected and could harm our revenues, cause us to fail to satisfy contractual commitments, lead to a termination of one or more of our contracts or lead to delays in our clinical trials, any of which could be costly to us and otherwise materially harm our business, financial condition, operating results and cash flows.
We depend on third parties to conduct many of our clinical and non-clinical trials. If these third parties do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize our product candidates and, as a result, our business, financial condition, operating results and cash flows may suffer.
We depend on third parties, such as independent clinical investigators, contract research organizations and other third-party service providers, to conduct the clinical and non-clinical trials of our product candidates and expect to continue to do so. We rely heavily on these third parties for successful execution of our clinical and non-clinical trials, but do not exercise day-to-day control over their activities. Our reliance on these service providers does not relieve us of our regulatory responsibilities, including ensuring that our trials are conducted in accordance with good clinical practice regulations and the plan and protocols contained in the relevant regulatory application. In addition, these organizations may not complete these activities on our anticipated or desired timeframe. We also may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization or other third party may lead us to seek to terminate the relationship and use an alternative service provider, which may prove difficult, costly and result in a delay of our trials. Any delay in or inability to complete our trials could delay or prevent the development, approval and commercialization of our product candidates.
In certain cases, government entities and non-governmental organizations ("NGOs") conduct studies of our product candidates, and we may seek to rely on these studies in applying for marketing approval for certain of our product candidates. These government entities and NGOs have no obligation or commitment to us to conduct or complete any of these studies or clinical trials and may choose to discontinue these development efforts at any time. Furthermore, government entities depend on annual Congressional appropriations to fund their development efforts, which may not be approved.
If we are unable to obtain any necessary third-party services on acceptable terms or if these service providers do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for our product candidates may be delayed or prevented.
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LEGAL AND REPUTATIONAL RISKS
Our financial condition and operating results could be adversely impacted by unfavorable results of legal proceedings or government investigations.
We are subject to various claims, legal proceedings and government investigations that have not yet been fully resolved, including stockholder derivative and putative class action lawsuits, and new matters may arise in the future. In addition, agreements entered into by us sometimes include indemnification provisions which can subject us to costs and damages in the event of a claim against an indemnified third party. The number of claims, legal proceedings and government investigations involving us, and the alleged magnitude of such claims, proceedings and government investigations, has generally increased over time and may continue to increase. Certain of these actions include, and future actual or threatened legal actions may include, claims for substantial and indeterminate amounts of damages, or may result in other actions adverse to us.
For example, multiple purported class action lawsuits have been filed against us and certain of our current and former senior officers in the United States District Court for the District of Maryland seeking unspecified damages on behalf of a putative class of persons who purchased or otherwise acquired shares of our common stock during various date ranges. The complaints, allege, among other things, that we made materially false and misleading statements regarding our procedures and quality controls relating to vaccine production, in violation of federal securities laws. As another example, multiple stockholder derivative lawsuits were filed in The Court of Chancery of the State of Delaware and the United States District Court for the District of Maryland on behalf of the Company against certain current and former officers and directors for breach of fiduciary duties, waste of corporate assets, unjust enrichment and insider trading, each allegation related to the Company’s capabilities to manufacture COVID-19 vaccine bulk drug substance. In addition to monetary damages, the complaints seek the implementation of multiple corporate governance and internal policy changes.
Regardless of merit, litigation can be both time-consuming and disruptive to our operations and cause significant expense and diversion of management’s attention. The outcome of litigation or government investigations is also inherently uncertain. If one or more legal matters were resolved against us or an indemnified third party in a reporting period for amounts above management’s expectations, our financial condition and operating results for that reporting period could be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against us and could require us to change our business practices or limit our ability to offer certain products and services, all of which could materially adversely affect our financial condition and operating results. While we maintain insurance coverage for certain types of claims, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.
We rely significantly on information technology systems and any cyber security incidents, unauthorized access or other failure, inadequacy, interruption or security lapse of that technology could harm our ability to operate our business effectively or result in data leakage of proprietary or confidential business or employee information.
Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. We previously contracted with the USG and pharmaceutical companies for the development and manufacture of a significant quantity of COVID-19 vaccines, which raised our security profile and heightened potential risks that malicious actors may seek to disrupt our systems or misappropriate our information. The size and complexity of our computer systems and those of many of our business partners, collaborators and other third parties make them potentially vulnerable to interruption, invasion, computer viruses, destruction, unauthorized or malicious intrusion and additional related disruptions, which may result in the impairment of production and key business processes. Our systems and information are also potentially vulnerable to cyber security incidents through user error, phishing scams, or malfeasance, as well as cyber security incidents involving our employees, business partners, collaborators or other third parties, any of which may expose sensitive data to unauthorized persons. Our systems and those of our business partners and collaborators have in the past been, and in the future likely will be subject to computer viruses, malicious codes, unauthorized access and other cyber security incidents. We are not aware of any significant impact on our operations or financial results from such incidents although, as of the date of this report, we are assessing the potential impact of a cyber security incident involving misuse of authorized access by a business partner of which we became aware in October 2023.
No system of protection is adequate to protect against all such threats, even if they are deemed to be industry standard, and there can be no assurance that we will be able to repel any such attacks. Cyber security incidents could lead to the loss of trade secrets or other intellectual property or the public exposure of personal information, including sensitive personal information, of our employees, clinical trial patients, customers and others. Responding to any such threats may also be expensive and time-consuming. Any such unauthorized access to our information, whether through an incident involving our information technology systems or those of our business partners, collaborators or other third parties, could disrupt our business operations, result in the loss of assets, and have a material adverse effect on our reputation, business, financial condition, or results of operations.
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While the Company has experienced non-material cyber incidents involving third-party vendors, the Company’s continued use of third parties in its business yields the potential for material cyber security incidents that may harm business operations.
A significant business disruption or a breach in security resulting in misappropriation, theft or sabotage with respect to proprietary or confidential business or employee information could result in significant financial losses, legal, business or reputational harm to us, compromise our business prospects and our commitments to the USG or other customers, any of which could materially and adversely affect our business, financial condition and operating results.
We face product liability exposure, which could cause us to incur substantial liabilities and negatively affect our business, financial condition and results of operations.
We face an inherent risk of product liability exposure related to the sale of our products, any other products that we successfully acquire or develop and the testing of our product candidates in clinical trials.
One measure of protection against such lawsuits is coverage under the PREP Act, which was signed into law in December 2005. The PREP Act creates liability protection for manufacturers of biodefense countermeasures when the Secretary of HHS issues a declaration for their manufacture, administration or use. A PREP Act declaration is meant to provide liability protection from all claims under federal or state law for loss arising out of the administration or use of a covered countermeasure under a government contract. The Secretary of HHS has issued PREP Act declarations covering countermeasures for smallpox, mpox, and other orthopox; anthrax; and botulinum toxin. These declarations apply to certain of our products, namely BioThrax®, ACAM2000®, raxibacumab, Anthrasil®, BAT® and VIGIV products, as covered countermeasures. Manufacturers are not entitled to protection under the PREP Act in cases of willful misconduct or for cases brought in non-U.S. tribunals or under non-U.S. law. We cannot predict whether the Secretary of HHS will renew the declarations when they expire, whether Congress will fund the relevant PREP Act compensation programs, or whether the necessary prerequisites for immunity would be triggered with respect to our products or product candidates.
Additionally, certain of our products, namely BioThrax® and RSDL®, are under the SAFETY Act, which provides certain product liability limitations for qualifying anti-terrorism technologies for claims arising from or related to an act of terrorism. Although BioThrax® and RSDL® are designated and certified under the SAFETY Act, the law may not provide adequate protection from claims made against us.
If we cannot successfully defend ourselves against future claims that our products or product candidates caused injuries and if we are not entitled to indemnity by the USG, or the USG does not honor its obligations to us under the PREP Act or SAFETY Act, or if the liability protections under the PREP Act and SAFETY Act are not adequate to cover all claims, we may incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:
•decreased demand or withdrawal of a product;
•injury to our reputation;
•withdrawal of clinical trial participants;
•costs to defend the related litigation;
•substantial monetary awards to trial participants or patients;
•loss of revenue; and
•an inability to commercialize products that we may develop.
The amount of insurance that we currently hold may not be adequate to cover all liabilities that we may incur. Further product liability insurance may be difficult and expensive to obtain. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be adequate to satisfy all potential liabilities. For example, we may not have sufficient insurance against potential liabilities associated with a possible large-scale deployment of BioThrax® vaccine as a countermeasure to a bioterrorism threat. We rely on PREP Act protection for BioThrax®, raxibacumab, ACAM2000®, Anthrasil®, BAT® and VIGIV products, and SAFETY Act protection for BioThrax® and RSDL® products in addition to our insurance coverage to help mitigate our product liability exposure for these products. Additionally, potential product liability claims related to our commercial products, including NARCAN®, may be made by patients, health care providers or others who sell or consume these products. Such claims may be made even with respect to those products that possess regulatory approval for commercial sale. Claims or losses in excess of our product liability insurance coverage could have a material adverse effect on our business, financial condition, operating results and cash flows.
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FINANCIAL RISKS
We have incurred significant indebtedness in connection with our acquisitions and servicing our debt requires a significant amount of cash. We may not have sufficient cash flow from our operations to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to further refinance, our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. We may also seek additional debt financing to support our ongoing activities or to provide additional financial flexibility. Debt financing can have significant adverse consequences for our business, including:
•requiring us to dedicate a substantial portion of cash flows from operations to payment on our debt, which would reduce available funds for other corporate initiatives;
•increasing the amount of interest that we have to pay on debt with variable interest rates, if market rates of interest increase, to the extent we are unable to offset such risk through our hedging instruments;
•subjecting us, as under our Senior Secured Credit Facilities and the indenture governing the Senior Unsecured Notes, to restrictive covenants that reduce our ability to take certain corporate actions, acquire companies, products or technology, or obtain further debt financing;
•requiring us to pledge our assets as collateral, which could limit our ability to obtain additional debt financing;
•limiting our flexibility in planning for, or reacting to, general adverse economic and industry conditions; and
•placing us at a competitive disadvantage compared to our competitors that have less debt, better debt servicing options or stronger debt servicing capacity.
We may not have sufficient funds or be able to obtain additional financing to pay the amounts due under our indebtedness. In addition, failure to comply with the covenants under our Senior Secured Credit Facilities and other debt agreements, including the maintenance of a specified consolidated net leverage ratio, debt service coverage ratio, consolidated EBITDA level, minimum liquidity level and required liquidity raise under our Senior Secured Credit Facilities, could result in an event of default under those agreements. An event of default could result in the acceleration of amounts due under a particular debt agreement and a cross default and acceleration under other debt agreements, and we may not have sufficient funds to pay or be able to obtain additional financing to make any accelerated payments.
Our current indebtedness restricts and any additional debt financing may restrict the operation of our business and limit the cash available for investment in our business operations.
The Senior Secured Credit Facilities include the Term Loan Facility, which had an outstanding principal balance of $202.1 million as of September 30, 2023 and the ability to borrow up to $300.0 million under our Revolving Credit Facility under which we had $211.2 million of outstanding borrowings as of September 30, 2023. On August 7, 2020, we completed an offering of $450.0 million aggregate principal amount of Senior Unsecured Notes. We may also seek additional debt financing to support our ongoing activities or to provide additional financial flexibility. Debt financing can have significant adverse consequences for our business, including:
•the level, timing and cost of product sales and CDMO services;
•the extent to which we acquire or invest in and integrate companies, businesses, products or technologies;
•the acquisition of new facilities and capital improvements to new or existing facilities;
•the payment obligations under our indebtedness;
•the scope, progress, results and costs of our development activities;
•our ability to obtain funding from collaborative partners, government entities and non-governmental organizations for our development programs;
•the extent to which we repurchase common stock under any future share repurchase program; and
•the costs of commercialization activities, including product marketing, sales and distribution.
In addition, our Senior Secured Credit Facilities and our Senior Unsecured Notes each contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other indebtedness. The occurrence of a default under any of these arrangements would permit the holders of the notes or the lenders under our Senior Secured Credit Facilities to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable, and there is no assurance that we would have sufficient funds to satisfy any such accelerated obligations.
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Our hedging programs have been, and any hedging program we initiate in the future will be, subject to counterparty default risk.
From time to time, we manage our interest rate risk in part by entering into interest rate swaps with a number of counterparties to swap a portion of our indebtedness that is based on variable interest rates to a fixed rate. As a result, when we are party to such interest rate swaps, we are subject to the risk that the counterparty to one or more of these contracts defaults on its performance under the contract. During an economic downturn, the counterparty's financial condition may deteriorate rapidly and with little notice and we may be unable to take action to protect our exposure. In the event of a counterparty default, we could incur losses, which may harm our business and financial condition. In the event that one or more of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty's default may be limited by the liquidity of the counterparty.
We require significant additional funding to be able to continue as a going concern and we may be unable to raise capital when needed or on acceptable terms, which would harm our ability to grow our business, and our results of operations and financial condition. In addition, any capital we raise may result in dilution to our current stockholders.
As of September 30, 2023, we had unrestricted cash and cash equivalents of $87.8 million and remaining capacity under our Revolving Credit Facility of $88.3 million. Also as of September 30, 2023, there was $211.2 million outstanding on our Revolving Credit Facility and $202.1 million on our Term Loan Facility that mature in May 2025. Certain provisions within the Credit Agreement Amendment require further action from the Company, most notably the requirement to raise not less than $75.0 million through the issuance of equity and/or unsecured indebtedness by April 30, 2024 and that the Company make quarterly principal payments of approximately $3.9 million on the Term Loan Facility. As a result, the Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements included in this Quarterly Report on Form 10-Q were issued. We will need to obtain substantial additional funding in connection with our continuing operations, which cannot be assured.
If our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity or debt offerings, bank loans or collaboration and licensing arrangements. In August 2021, we filed an automatic shelf registration statement, which immediately became effective under SEC rules. For so long as we continue to satisfy the requirements to be deemed a “well-known seasoned issuer” under SEC rules, this shelf registration statement, effective until August 9, 2024, allows us to issue an unrestricted amount of equity, debt and certain other types of securities through one or more future primary or secondary offerings. If we do not file a new shelf registration statement prior to the expiration of our automatic shell registration statement (whether by lapse of time due to us no longer qualifying as a "well-known seasoned issuer"), the existing shelf registration statement will expire, and we will not be able to publicly raise capital or issue debt until a new registration statement is filed and becomes effective. There can be no assurance that we will be eligible to file an automatically effective shelf registration statement at a future date when we may need to raise funds publicly.
If we raise funds by issuing equity securities, including through our ATM Program, our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants, like those contained in our Senior Secured Credit Facilities and the indenture governing the Senior Unsecured Notes, limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities or declaring dividends. If we raise funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us. Our Senior Secured Credit Facilities as well as the indenture governing the Senior Unsecured Notes restrict our ability to incur additional indebtedness.
Economic conditions may make it difficult to obtain financing on attractive terms, or at all. If financing is unavailable or lost, our business, operating results, financial condition and cash flows would be adversely affected, and we could be forced to delay, reduce the scope of or eliminate many of our planned activities.
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We may not maintain profitability in future periods or on a consistent basis.
Our profitability has been substantially dependent on product sales, which historically have fluctuated significantly from quarter to quarter, and we expect that they will continue to fluctuate significantly based primarily on the timing of our fulfillment of orders from the USG. We may not be able to achieve consistent profitability on a quarterly basis or sustain or increase profitability on an annual basis.
Impairment charges to our intangible assets or property, plant and equipment could have a material adverse effect on our business, results of operations and financial condition.
In accordance with GAAP, we are required to assess the value of our intangible assets and goodwill annually, or more frequently whenever events or changes in circumstances indicate potential impairment, such as changing market conditions or any changes in key assumptions. If the testing performed indicates that an asset may not be recoverable, we are required to record a non-cash impairment charge for the difference between the carrying value of the asset and its implied fair value in the period the determination is made.
We also periodically monitor the remaining net book values of our property, plant and equipment, or whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. For example, we performed recoverability tests on certain asset groups within the CDMO reporting unit during the three months ended June 30, 2023, and allocated and recognized a non-cash impairment charge of $306.7 million during the three months ended June 30, 2023 related to certain CDMO long-lived assets.
In addition, we annually perform a goodwill impairment evaluation, during the fourth quarter, or sooner if triggering events are identified. During the three months ended September 30, 2023 as a result of continued market volatility, including significant declines in our market capitalization and revised financial outlook, we determined that a triggering event had occurred that required an evaluation of our goodwill for potential impairment As a result of the quantitative assessments, we determined that our goodwill, which related to the MCM reporting unit within the Products segment was fully impaired and recorded a $218.2 million non-cash goodwill impairment charge during the three months ended September 30, 2023.
We have a significant amount of intangible assets and property, plant and equipment on our balance sheet. The impairment tests require us to make an estimate of the fair value of our reporting units. An impairment could be recorded as a result of changes in assumptions, estimates or circumstances, some of which are beyond our control. Since a number of factors may influence determinations of fair value, we are unable to predict whether impairments of intangible assets and property, plant and equipment will occur in the future, and we can provide no assurance that continued conditions will not result in future impairments of these assets. The future occurrence of a potential indicator of impairment could include matters such as (i) a decrease in expected net earnings, (ii) adverse equity market conditions, (iii) a decline in current market multiples, (iv) a decline in our common stock price, (v) a significant adverse change in legal factors or the general business climate, and (vi) an adverse action or assessment by a regulator. Any such impairment would result in us recognizing a non-cash charge in our consolidated balance sheets, which could adversely affect our business, results of operations and financial condition.
The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. We have identified material weaknesses in our internal control over financial reporting and have restated prior period financial statements that resulted from one of these material weaknesses, which may raise questions regarding the accuracy and reliability of our financial statements and our ability to report accurately in the future.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. During the process of preparing the financial statements as of and for the year ended December 31, 2022, we determined that we had a material weakness related to our inventory accounting. Subsequently, in connection with the preparation of the financial statements as of and for the periods ended September 30, 2023, we determined that we had a material weakness related to the calculation and review of the Company’s net state deferred tax liability and that this material weakness had existed as of December 31, 2022 and resulted in a material misstatement to our consolidated financial statements for the period ended December 31, 2022. Due to the existence of these material weaknesses, our management concluded that as of December 31, 2022 our internal control over financial reporting was not effective and we were required to restate the financial statements included in our Original Form 10-K and filing Amendment No. 1 to the Original Form 10-K for the fiscal year ended December 31, 2022.
We determined that we remediated our internal weakness with respect to inventory accounting as of March 31, 2023 and we are taking steps to remediate the material weakness related to the calculation and review of the Company’s net state deferred tax liability.
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In addition, we have restated our financial statements for the fiscal year ended December 31, 2022 to correct the errors that were identified as a result of the material weakness regarding our calculation and review of the Company’s net state deferred tax liability, and corrected other unrelated errors that were either unrecorded or addressed as out-of-period adjustments in previously filed financial statements that were not material, individually or in the aggregate, to those financial statements. However, we cannot provide any assurance that the measures we have taken to date and we intend to implement will be sufficient to remediate the material weakness regarding state deferred taxes that we have identified, or to avoid additional material weaknesses from occurring in the future. The material weaknesses in our internal control over financial reporting and the restatement of our prior financial statements may raise significant questions regarding the accuracy and reliability of our filed financial statements and our ability to report in an accurate and timely manner in the future. These material weaknesses and resulting errors in our financial statements, or those that may occur in the future, could have an adverse effect on our ability to meet our reporting obligations, which could cause our investors to lose confidence in our publicly reported information, cause the market price of our stock to decline, harm our reputation, business and financial results, and expose us to stockholder litigation and sanctions or investigations by the SEC or other regulatory authorities.
The expansion of our international operations increases our risk of exposure to credit losses.
As we continue to expand our business activities with foreign governments in certain countries that have experienced deterioration in credit and economic conditions or otherwise, our exposure to uncollectible accounts will rise. Global economic conditions and liquidity issues in certain countries have resulted and may continue to result in delays in the collection of accounts receivable and may result in credit losses. Future governmental actions and customer specific actions may require us to re-evaluate the collectability of our accounts receivable and we may potentially incur credit losses that materially impact our operating results.
RISKS RELATED TO STRATEGIC ACQUISITIONS, DIVESTITURES AND COLLABORATIONS
We may not be successful in identifying, structuring or acquiring businesses and products to drive our growth.
We may not be successful in identifying, effectively evaluating, structuring, acquiring or in-licensing, and developing and commercializing additional products on favorable terms, or at all. Competition for attractive product opportunities is intense and may require us to devote substantial resources, both managerial and financial, to an acquisition opportunity. A number of more established companies are also pursuing strategies to acquire or in-license products in the biopharmaceutical field. These companies may have a competitive advantage over us due to their size, cash resources, cost of capital, effective tax rate and greater clinical development and commercialization capabilities.
Acquisition efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote significant resources to potential acquisitions that are never completed. Even if we are successful in acquiring a company or product, it may not result in a successfully developed or commercialized product or, even if an acquired product is commercialized, competing products or technologies could render a product noncompetitive, uneconomical or obsolete. Moreover, the cost of acquiring other companies or in-licensing products could be substantial, and in order to acquire companies or new products, we may need to incur substantial debt or issue dilutive securities.
If we are unsuccessful in our efforts to identify and acquire other companies, products, or in-license and develop additional products, or if we acquire or in-license unproductive assets, it could have a material adverse effect on the growth of our business, and we could be compelled to record significant impairment charges to write-down the carrying value of our acquired intangible assets, which could materially harm our business, financial condition, operating results and cash flows.
Our failure to successfully integrate acquired businesses and/or assets into our operations could adversely affect our ability to realize the benefits of such acquisitions and, therefore, to grow our business.
We may not be able to integrate any acquired business successfully or operate any acquired business profitably. In addition, cost synergies, if achieved at all, may be less than we expect, or may take greater time to achieve than we anticipate.
Issues that could delay or prevent successful integration or cost synergies of an acquired business or products include, among others:
•retaining existing customers and attracting new customers;
•retaining key employees;
•diversion of management attention and resources;
•conforming internal controls, policies and procedures, business cultures and compensation programs;
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•consolidating corporate and administrative infrastructures;
•successfully executing technology transfers and obtaining required regulatory approvals;
•consolidating sales and marketing operations;
•identifying and eliminating redundant and underperforming operations and assets;
•assumption of known and unknown liabilities;
•coordinating geographically dispersed organizations;
•managing tax costs or inefficiencies associated with integrating operations; and
•risks associated with intellectual property rights related to an acquisition or collaboration.
If we are unable to successfully integrate pending and future acquisitions with our existing businesses, or operate any acquired business profitably, we may not obtain the advantages that the acquisitions were intended to create, which may materially adversely affect the growth of our business, financial condition, operating results and cash flows.
We may not realize the expected benefits of the sale of our travel health business to Bavarian Nordic.

On May 15, 2023, pursuant to the Purchase and Sale Agreement, we completed the previously announced sale to Bavarian Nordic of our travel health business, including rights to Vaxchora and Vivotif, as well as our development-stage chikungunya vaccine candidate CHIKV VLP, our manufacturing site in Bern, Switzerland and certain of our development facilities in San Diego, California for a cash purchase price of $270.0 million, subject to certain customary adjustments. In addition, we may receive milestone payments of up to $80.0 million related to the development of CHIKV VLP and receipt of marketing approval and authorization in the U.S. and Europe, and sales-based milestone payments of up to $30.0 million based on aggregate net sales of Vaxchora and Vivotif in calendar year 2026.
There can be no assurance that we will be able to realize in full the expected benefits of the transaction. If we are unable to or do not realize the expected strategic, economic, or other benefits of the transaction, it could adversely affect our business and financial position.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Our business or our share price could be negatively affected as a result of the actions of stockholders.
In recent years, some stockholders have placed increasing pressure on publicly traded companies in our industry and others to effect changes to corporate governance practices, executive compensation practices, social and environmental practices and to undertake certain corporate actions. This may be true even if they only hold a minority of shares. In addition, many institutional investors are increasingly focused on environmental, social, and corporate governance ("ESG") factors. These investors may be seeking enhanced ESG disclosures or to implement policies adverse to our business. There can be no assurances that stockholders will not publicly advocate for us to make corporate governance changes or engage in certain corporate actions. Responding to challenges from stockholders, such as proxy contests, media campaigns or other public or private means, could be costly and time consuming and could have an adverse effect on our reputation and divert the attention and resources of management and our board of directors, which could have an adverse effect on our business and operational results. Any such stockholder actions or requests, or the mere public presence of stockholders with a reputation for taking such actions among our investor base, could also cause the market price of our common stock to experience periods of significant volatility.
Provisions in our certificate of incorporation and by-laws and under Delaware law may discourage acquisition proposals, delay a change in control or prevent transactions that stockholders may consider favorable.
Provisions in our certificate of incorporation and by-laws may discourage, delay or prevent a merger, acquisition or other changes in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.
These provisions include:
•the classification of our directors;
•limitations on changing the size of our board of directors;
•limitations on the removal of directors;
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•limitations on filling vacancies on the board of directors;
•advance notice requirements for stockholder nominations of candidates for election to the board of directors and other proposals;
•the inability of stockholders to act by written consent;
•the inability of stockholders to call special meetings; and
•the ability of our board of directors to designate the terms of and issue a new series of preferred stock without stockholder approval.
The affirmative vote of a majority of our board of directors or the holders of our capital stock representing at least 75% of the voting power of all outstanding stock entitled to vote is required to amend or repeal the above provisions of our certificate of incorporation or by-laws. The affirmative vote of either a majority of the directors present at a meeting of our board of directors or holders of our capital stock representing at least 75% of the voting power of all outstanding stock entitled to vote is required to amend or repeal our by-laws.
In addition, we are subject to Section 203 of the Delaware General Corporation Law ("Section 203"). In general and subject to certain exceptions, Section 203 prohibits a publicly-held corporation from engaging in a business combination with an interested stockholder, generally a person which, together with its affiliates, owns or within the last three years has owned 15% or more of the corporation's voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of us.
Our board of directors may implement a new stockholder rights plan without stockholder approval, which could prevent a change in control of us in instances in which some stockholders may believe a change in control is in their best interests.
Our board of directors may implement a stockholder rights plan without stockholder approval, which may have anti-takeover effects, potentially preventing a change in control of us in instances in which some stockholders may believe a change in control is in their best interests. This could cause substantial dilution to a person or group that attempts to acquire us on terms that our board of directors does not believe are in our best interests or those of our stockholders and may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares.
Our stock price is volatile, and purchasers of our common stock could incur substantial losses.
Our stock price has been, and is likely to continue to be, volatile. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this “Risk Factors” section, or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors or suppliers regarding their own performance, as well as industry conditions and general financial, economic and political instability. From November 15, 2006, when our common stock first began trading on the New York Stock Exchange, through November 29, 2023, our common stock has traded as high as $137.61 per share and as low as $1.81 per share. The market price of our common stock may be influenced by many factors, including, among others:
•contracts, decisions and procurement policies by the USG affecting our anthrax vaccines and our other products and product candidates;
•the success of competitive products or technologies;
•results of clinical and non-clinical trials of our product candidates;
•announcements of acquisitions, financings or other transactions by us;
•litigation or legal proceedings;
•public concern as to the safety of our products;
•termination or delay of a development program;
•the recruitment or departure of key personnel;
•variations in our product revenue and profitability; and
•the other factors described in this “Risk Factors” section.
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Because we currently do not pay dividends, investors will benefit from an investment in our common stock only if it appreciates in value.
We currently do not pay dividends on our common stock. Our Senior Secured Credit Facilities and the indenture governing our Senior Unsecured Notes limit and any future debt agreements that we enter into may limit our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our stockholders based on current expectations.
Future sales of our common stock or other securities convertible into common stock, or the perception that such sales or issuances could occur, could result in dilution of our stockholders and could cause our share price to decline.
Our board of directors is authorized, without stockholder approval, to cause us to issue additional shares of our common stock or to raise capital through the issuance of preferred shares or the sale of debt securities that are convertible into common stock, options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may determine. In addition, under the Credit Agreement Amendment, we are required to increase our liquidity by April 30, 2024 by raising at least $75 million of equity or unsecured indebtedness. We also require substantial additional funding to be able to continue as a going concern and we may seek to achieve such funding through future sales of our common stock or other securities convertible into our common stock. Sales of substantial amounts of our common stock or the issuance of preferred shares, convertible debt, options, restricted stock units, performance stock units, warrants and other rights, or the perception that such sales or issuances could occur could cause the market price of our common stock to decrease significantly. As of September 30, 2023, we had 51,837,164 shares of common stock issued and outstanding. We cannot predict the effect, if any, of future sales of our common stock or any preferred shares, convertible debt securities, options, restricted stock units, performance stock units, warrants or other rights or the availability of our common stock for future sales on the value of our common stock.
GENERAL RISK FACTORS
Our success is dependent on our continued ability to attract, motivate and retain key personnel, and any failure to attract or retain key personnel may negatively affect our business.
Because of the specialized scientific nature of our business, our ability to develop products and to compete with our current and future competitors largely depends upon our ability to attract, retain and motivate highly qualified managerial and key scientific and technical personnel (including quality and manufacturing personnel). If we are unable to retain the services of one or more of the principal members of senior management or other key employees, our ability to implement our business strategy could be materially harmed. We face intense competition for qualified employees from biopharmaceutical companies, research organizations and academic institutions. Attracting, retaining or replacing these personnel on acceptable terms may be difficult and time-consuming given the high demand in our industry for similar personnel. We believe part of being able to attract, motivate and retain personnel is our ability to offer a competitive compensation package, including equity incentive awards. If we cannot offer a competitive compensation package to attract and retain the qualified personnel necessary for the continued development of our business, we may not be able to maintain our operations or grow our business.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Recent sales of unregistered securities
Not applicable.
Use of proceeds
Not applicable.
Purchases of equity securities
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the three months ended September 30, 2023, none of the Company's directors or Section 16 reporting officers adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).
ITEM 6. EXHIBITS
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits hereto.
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Exhibit Index
Exhibit
Number		 Description
10.1 #*
10.2 #*
31.1 #
31.2 #
32.1 #
32.2 #
101 #
The following financial information related to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statement of Changes in Stockholders' Equity; and (vi) the related Notes to the Condensed Consolidated Financial Statements.
104 # Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.
# Filed herewith.
* Management or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EMERGENT BIOSOLUTIONS INC.
By: /s/HAYWOOD MILLER
Haywood Miller
Interim Chief Executive Officer
(Principal Executive Officer)
Date: December 11, 2023
By: /s/RICHARD S. LINDAHL
Richard S. Lindahl
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: December 11, 2023
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EX-10.1 2 emergentbiosolutionsincind.htm EX-10.1 Document

EMERGENT BIOSOLUTIONS INC.
INDUCEMENT PLAN

1.    Purpose

The purpose of this Inducement Plan (the “Plan”) of Emergent BioSolutions Inc., a Delaware corporation (the “Company”), is to enable the Company to provide a material inducement to prospective employees who are expected to make important contributions to the Company and by providing such persons with equity ownership opportunities and performance-based incentives that are intended to align their interests with those of the Company’s stockholders. This Plan is intended to meet the requirements of a plan providing for inducement awards under the listing standards of the New York Stock Exchange (“NYSE”) or other stock exchange on which the shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), is then listed and shall be administered in accordance with such intent. Except where the context otherwise requires, the term “Company” shall include any of the Company’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”) and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a controlling interest, as determined by the Board.

2.    Eligibility

Any individual not previously an employee or director of the Company or any of its subsidiaries and any individual following a bona fide period of interruption of employment with the Company or any of its subsidiaries is eligible to receive nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other stock-unit awards (each, an “Award”) under the Plan as a material inducement to such person accepting employment with the Company or any of its subsidiaries. Non-employee directors and consultants are not eligible to receive Awards under the Plan. Each person who receives an Award under the Plan is deemed a “Participant.” All of the terms and conditions of each Award shall be set forth in an Award agreement.

3.    Administration and Delegation

(a)    Administration by Board of Directors. The Plan will be administered by the Board. The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may construe and interpret the terms of the Plan and any Award agreements entered into under the Plan. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board’s sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith.

(b)    Appointment of Compensation Committee. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to the Compensation Committee of the Board (the “Committee”). All references in the Plan to the “Board” shall mean the Board, the Committee or the officers referred to in Section 3(c) to the extent that the Board’s powers or authority under the Plan have been delegated to such Committee or officers.

(c) Delegation to Officers. Subject to any requirements of applicable law (including as applicable Sections 152 and 157(c) of the General Corporation Law of the State of Delaware) and applicable stock exchange listing standards, the Board may delegate to one or more officers of the Company such ministerial tasks as it deems appropriate in connection with the Plan.



(d)    Approval Requirement. Notwithstanding the foregoing or anything in the Plan to
the contrary, the grant of Awards under the Plan must be approved by the Compensation Committee or a majority of the Company’s independent directors in order to comply with the exemption from stockholder approval requirements applicable to “inducement awards” under applicable stock exchange listing standards.

4.    Stock Available for Awards.

(a)    Maximum Number of Shares. An aggregate of 5,000,000 shares of Common
Stock) may be delivered in satisfaction of Awards under the Plan.

If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part (including as the result of shares of Common Stock subject to such Award being repurchased by the Company at the original issuance price pursuant to a contractual repurchase right), is settled in cash, or results in any shares of Common Stock not being issued, the unused shares of Common Stock covered by such Award shall again be available for the grant of Awards under the Plan. Shares of Common Stock delivered (either by actual delivery, attestation or net exercise) to the Company by a Participant to (i) purchase shares of Common Stock upon the exercise of an Award or (ii) satisfy tax withholding obligations with respect to Options and Stock Appreciation Rights (including shares retained from the Option or Stock Appreciation Right creating the tax obligation) shall not be added back to the number of shares available for future grant of Awards (for the avoidance of doubt, shares of Common Stock delivered to the Company by a Participant to satisfy tax withholding obligations with respect to Restricted Stock, Restricted Stock Units and Other Stock Unit Awards (including shares retained from the Restricted Stock, Restricted Stock Unit or Other Stock Unit Award creating the tax obligation) shall be added back to the number of shares available for future grant of Awards). Shares of Common Stock issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. Notwithstanding anything to the contrary herein, with respect to Stock Appreciation Rights settled in shares of Common Stock upon exercise, the aggregate number of shares of Common Stock with respect to which the Stock Appreciation Right is exercised, rather than the number of shares of Common Stock actually issued upon exercise, shall be counted against the number of shares of Common Stock available for Awards under the Plan. In no event shall shares of Common Stock repurchased by the Company on the open market using the proceeds from the exercise of an Award increase the number of shares available for future grant of Awards.

(b)    Computing the Total Number of Shares of Common Stock Available Under the
Plan. For purposes of computing the maximum aggregate number of shares of Common Stock available for issuance under the Plan, the following rules shall apply:

(i)    Any shares of Common Stock made subject to Awards shall be counted
against the maximum aggregate number of shares of Common Stock available for issuance under the Plan as one (1) share of Common Stock for every one (1) share of Common Stock granted.

(ii)    Any shares of Common Stock made subject to Awards which shares are
returned to the Plan pursuant to Section 4(a) shall be returned as one (1) share of Common Stock for every one (1) share of Common Stock granted.

(c)    Sublimits. The maximum number of shares of Common Stock with respect to which
Awards may be granted to any Participant under the Plan shall be 1,000,000 per calendar year. For purposes of the foregoing limit, the combination of an Option in tandem with a SAR (as each is hereafter defined) shall be treated as a single Award. For the avoidance of doubt, all shares of Common Stock underlying Awards granted under the Plan shall be counted on a one-for-one basis for purposes of the sublimit set forth in this section.



(d)    Substitute Awards. In connection with a merger or consolidation of an entity with
the Company or the acquisition by the Company of property or stock of an entity, the Board may
grant Awards in substitution for any options or other stock or stock unit awards granted by such entity or an affiliate thereof to the extent permitted by applicable stock exchange listing standards. Substitute Awards may be granted on such terms as the Board deems appropriate in the circumstances, notwithstanding any limitations on Awards contained in the Plan, including provisions that preserve the aggregate option spread as of the closing date of any such transaction in a manner that complies with Section 409A of the Code. Substitute Awards shall not count against the overall share limit set forth in Section 4(a).

5.    Stock Options

(a)    General. The Board may grant nonstatutory stock options to purchase Common Stock (each, an “Option”) and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable.

(b)    Exercise Price. The Board shall establish the exercise price of each Option and specify such exercise price in the applicable option agreement; provided, however, that the exercise price shall not be less than 100% of the Fair Market Value (as defined below) on the date the Option is granted. Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above as a substitution for a stock option or stock appreciation right in accordance with and pursuant to Section 409A of the Code.

(c)    Duration and Vesting of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement subject to the limitations of the Plan. Subject to Section 10(h), Options that vest solely based on the passage of time shall not vest prior to the first anniversary of the date of grant.

Notwithstanding the foregoing, the Board or the Committee, either at the time the Option is granted
or at any time thereafter, may allow an Option to accelerate and become vested, in whole or in part, prior to the vesting date specified above, in the event of the death or disability of the Participant. Options that do not vest solely based on the passage of time shall not vest prior to the first anniversary of the date of grant. The foregoing minimum vesting requirements shall not apply to Awards granted, in the aggregate, for up to 5% of the authorized number of shares specified in Section 4(a). For the avoidance of doubt, all shares of Common Stock underlying Awards granted under the Plan shall be counted on a one-for-one basis for purposes of the minimum vesting provision set forth in this section.

(d)    Exercise of Option. Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. Subject to Section 10(e), shares of Common Stock subject to the Option will be delivered by the Company following exercise either as soon as practicable.

(e)    Payment Upon Exercise. Common Stock purchased upon the exercise of an Option
granted under the Plan shall be paid for as follows:

(i)    in cash or by check, payable to the order of the Company;



(ii) except as otherwise provided in the applicable option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price and any required tax withholding or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price and any required tax withholding; (iii) to the extent provided for in the applicable option agreement or approved by the Board, in its sole discretion, by delivery (either by actual delivery or attestation) of shares of Common Stock owned by the Participant valued at their fair market value as determined by (or in a manner approved by) the Board to be appropriate in a manner consistent with the valuation principles under Sections 409A, except as the Board may expressly determine otherwise (“Fair Market Value”), provided (i) such method of payment is then permitted under applicable law, (ii) such Common Stock, if acquired directly from the Company, was owned by the Participant for such minimum period of time, if any, as may be established by the Board in its discretion and (iii) such Common Stock is not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements; (iv) to the extent permitted by applicable law and provided for in the applicable option agreement or approved by the Board, in its sole discretion, by (a) delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (b) payment of such other lawful consideration as the Board may determine; or (v) by any combination of the above permitted forms of payment.

(f)    Limitation on Repricing. Unless such action is approved by the Company’s
stockholders or is pursuant to Section 9 of the Plan: (i) outstanding Options granted under the Plan may not be amended to provide an exercise price per share that is lower than the then-current exercise price per share of such outstanding Option, (ii) the Board may also not cancel any outstanding option (whether or not granted under the Plan) and grant in substitution therefor new Awards under the Plan covering the same or a different number of shares of Common Stock and having an exercise price per share lower than the then-current exercise price per share of the cancelled option, (iii) the Board may not cancel in exchange for a cash payment any outstanding Option with an exercise price per share above the then-current Fair Market Value or (iv) the Board may not take any other action under the Plan that constitutes a “repricing” under the rules of the NYSE or other stock exchange on which the Common Stock is then listed.

(g)    Dividends and Dividend Equivalents. Notwithstanding any other provision of the
Plan, no Dividends or Dividend Equivalents may be paid with respect to any Option granted under the Plan. For the avoidance of doubt, to the extent that an Option is settled in shares of Common Stock, the recipient will be eligible to receive Dividends on such shares after settlement on the same basis as any other stockholder of the Company.

6.    Stock Appreciation Rights

(a)    General. A Stock Appreciation Right, or SAR, is an Award entitling the holder, upon exercise, to receive an amount of Common Stock determined by reference to appreciation,
from and after the date of grant, in the fair market value of a share of Common Stock. The date as of which such appreciation or other measure is determined shall be the exercise date.

(b)    Grants. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan.

(i) Tandem Awards. When Stock Appreciation Rights are expressly granted in tandem with Options, (i) the Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable (except to the extent designated by the Board in connection with a Reorganization Event or a Change in Control Event) and will be exercisable in accordance with the procedure required for exercise of the related Option; (ii) the Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except to the extent designated by the Board in connection with a Reorganization Event or a Change in Control Event and except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right; (iii) the Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right; and (iv) the Stock Appreciation Right will be transferable only with the related Option. No tandem SAR may have a base amount that is less than 100% of the fair market value of a share of Common Stock on the date of grant. No tandem SAR granted may have a term of more than seven (7) years from the date of grant.



(ii)    Independent SARs. A Stock Appreciation Right not expressly granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Board may specify in the SAR Award; provided, however, that the base amount specified on the date of grant to calculate appreciation shall be no less than 100% of the fair market value of a share of Common Stock on the date of grant and the maximum term of any Stock Appreciation Right shall be no more than seven (7) years from the date of grant.

(c)    Exercise. Stock Appreciation Rights may be exercised by delivery to the Company
of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board, together with any other documents required by the Board.

(d)    Vesting. Subject to Section 10(h), Stock Appreciation Rights that vest solely based
on the passage of time shall not vest prior to the first anniversary of the date of grant. Notwithstanding the foregoing, the Board or the Committee, either at the time the Stock Appreciation Right is granted or at any time thereafter, may allow an Stock Appreciation Right to accelerate and become vested, in whole or in part, prior to the vesting date specified above, in the event of the death or disability of the Participant. Stock Appreciation Rights that do not vest solely based on the passage of time shall not vest prior to the first anniversary of the date of grant. The foregoing minimum vesting requirements shall not apply to Awards granted, in the aggregate, for up to 5% of the authorized number of shares specified in Section 4(a). For the avoidance of doubt, all shares of Common Stock underlying Awards granted under the Plan shall be counted on a one[1]for-one basis for purposes of the minimum vesting provision set forth in this section.

(e)    Limitation on Repricing. Unless such action is approved by the Company’s stockholders or is pursuant to Section 9 of the Plan: (i) outstanding Stock Appreciation Rights granted under the Plan may not be amended to provide a base price per share that is lower than the then-current base price per share of such outstanding Stock Appreciation Right, (ii) the Board may also not cancel any outstanding stock appreciation right (whether or not granted under the Plan) and grant in substitution therefor new Awards under the Plan covering the same or a different number of shares of Common Stock and having a base price per share lower than the then-current base price per share of the cancelled stock appreciation right, (iii) the Board may not cancel in exchange for a cash payment any outstanding Stock Appreciation Right with a base price per share above the then-current Fair Market Value or (iv) the Board may not take any other action under the Plan that constitutes a “repricing” under the rules of the NYSE or other stock exchange on which the Common Stock is then listed.

(f)    Dividends and Dividend Equivalents. Notwithstanding any other provision of the
Plan, no Dividends or Dividend Equivalents may be paid with respect to any Stock Appreciation Right granted under the Plan. For the avoidance of doubt, to the extent that a Stock Appreciation Right is settled in shares of Common Stock, the recipient will be eligible to receive Dividends on such shares after settlement on the same basis as any other stockholder of the Company.

7.    Restricted Stock; Restricted Stock Units

(a)    General. The Board may grant Awards entitling recipients to acquire shares of
Common Stock (“Restricted Stock”), subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award. Instead of granting Awards for Restricted Stock, the Board may grant restricted stock unit Awards entitling the recipient to receive shares of Common Stock to be delivered at the time such shares of Common Stock vest (“Restricted Stock Units”) (Restricted Stock and Restricted Stock Units are each referred to herein as a “Restricted Stock Award”).



(b)    Terms and Conditions for all Restricted Stock Awards. The Board shall determine the terms and conditions of a Restricted Stock Award, including the conditions for vesting and repurchase (or forfeiture) and the issue price. In addition, the following minimum vesting provisions shall apply. Subject to Section 10(h), Restricted Stock Awards that vest solely based on the passage of time shall not vest prior to the first anniversary of the date of grant. Subject to Section 10(h), Restricted Stock Awards that do not vest solely based on the passage of time shall not vest prior to the first anniversary of the date of grant. Notwithstanding any other provision of the Plan (other than Section 10(i), if applicable), the Board or Committee may, either at the time a Restricted Stock Award is made or at any time thereafter, waive any right to repurchase shares of Common Stock (or waive the forfeiture thereof) or remove or modify the restrictions applicable to the Restricted Stock Award, in whole or in part, in the event of the death or disability of the Participant. The foregoing minimum vesting requirements shall not apply to Awards granted, in the aggregate, for up to 5% of the authorized number of shares specified in Section 4(a). For the avoidance of doubt, all shares of Common Stock underlying Awards granted under the Plan shall be counted on a one-for-one basis for purposes of the minimum vesting provisions set forth in this section.

(c)    Additional Provisions Relating to Restricted Stock

(i)    Dividends. Unless otherwise provided in the applicable Award agreement,
any dividends (whether paid in cash, stock or property) declared and paid by the Company (“Dividends”) with respect to shares of Restricted Stock (“Unvested Dividends”) shall vest and be paid to the Participant only if and when such shares become free from the restrictions on forfeitability that apply to such shares. Each payment of Unvested Dividends will be made no later than the end of the calendar year in which the dividends are paid to stockholders of that class of stock or, if later, the 15th day of the third month following the date the shares of Restricted Stock are no longer subject to a substantial risk of forfeiture (i.e., no later than the 15th day of the third month following the date on which the shares of Restricted Stock vest).

(ii)    Stock Certificates. The Company may require that any stock certificates
issued in respect of shares of Restricted Stock shall be deposited in escrow by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant’s death (the “Designated Beneficiary”). In the absence of an effective designation by a Participant, “Designated Beneficiary” shall mean the Participant’s estate.

(d)    Additional Provisions Relating to Restricted Stock Units

(i)    Settlement. Upon the vesting of and/or lapsing of any other restrictions (i.e.,
settlement) with respect to each Restricted Stock Unit, the Participant shall be entitled to receive from the Company such number of shares of Common Stock or an amount of cash equal to the Fair Market Value of such number of shares of Common Stock, as provided in the applicable Award agreement. The Board may, in its discretion, provide that settlement of Restricted Stock Units shall be deferred, on a mandatory basis or at the election of the Participant, to the extent consistent with and permitted by Section 409A of the Code.

(ii)    Voting Rights. A Participant shall have no voting rights with respect to any
Restricted Stock Units.



(iii) Dividend Equivalents. To the extent provided by the Board, in its sole discretion, a grant of Restricted Stock Units may provide Participants with the right to receive an amount equal to any dividends or other distributions declared and paid on an equal number of outstanding shares of Common Stock (“Dividend Equivalents”). Dividend Equivalents may be settled in cash and/or shares of Common Stock and shall be subject to the same restrictions on vesting, transfer, and forfeitability as the Restricted Stock Units with respect to which paid, as determined by the Board in its sole discretion, subject in each case to such terms and conditions as the Board shall establish, in each case to be set forth in the applicable Award agreement.

8.    Other Stock-Unit Awards

Other Awards of shares of Common Stock, and other Awards that are valued in whole or in part
by reference to, or are otherwise based on, shares of Common Stock or other property, may be
granted hereunder to Participants (“Other Stock Unit Awards”), including without limitation Awards entitling recipients to receive shares of Common Stock to be delivered in the future. Such Other Stock Unit Awards shall also be available as a form of payment in the settlement of other Awards granted under the Plan or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Stock Unit Awards may be paid in shares of Common Stock or cash, as the Board shall determine. Subject to the provisions of the Plan, the Board shall determine the terms and conditions of each Other Stock Unit Award, including any purchase price applicable thereto, provided that for Other Stock Unit Awards the following minimum vesting provisions shall apply.

Subject to Section 10(h), Other Stock Unit Awards granted to Participants other than non[1]employee directors that vest solely based on the passage of time shall not vest prior to the first anniversary of the date of grant. Subject to Section 10(h), Other Stock Unit Awards that do not vest solely based on the passage of time shall not vest prior to the first anniversary of the date of grant.

Notwithstanding any other provision of the Plan (other than Section 10(i), if applicable), the Board
or Committee may, either at the time an Other Stock Unit Award is made or at any time thereafter,
waive any right to repurchase shares of Common Stock (or waive the forfeiture thereof) or remove
or modify the restrictions applicable to the Other Stock Unit Award, in whole or in part, in the event of the death or disability of the Participant. The foregoing minimum vesting requirements shall not apply to Awards granted, in the aggregate, for up to 5% of the authorized number of shares specified in Section 4(a)(1). For the avoidance of doubt, all shares of Common Stock underlying Awards granted under the Plan shall be counted on a one-for-one basis for purposes of the minimum vesting provisions set forth in this section.

To the extent provided by the Board, in its sole discretion, a grant of an Other Stock Unit Award
may provide Participants with the right to receive Dividend Equivalents with respect to such Other Stock Unit Award. Dividend Equivalents may be settled in cash and/or shares of Common Stock and shall be subject to the same restrictions on vesting, transfer, and forfeitability as the Other Stock Unit Award with respect to which paid, as determined by the Board in its sole discretion, subject in each case to such terms and conditions as the Board shall establish, in each case to be set forth in the applicable Award agreement.

9.    Adjustments for Changes in Common Stock and Certain Other Events

(a)    Changes in Capitalization. In the event of any stock split, reverse stock split, stock
dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any dividend or distribution to holders of Common Stock other than an ordinary cash dividend, (i) the number and class of securities available under this Plan, (ii) the limits set forth in Section 4(c), (iii) the share- and per-share provisions and the exercise price of each SAR, (iv) the number of shares subject to and the repurchase price per share subject to each outstanding Restricted Stock Award, and (v) the share- and per-share-related provisions and the purchase price, if any, of each outstanding Other Stock Unit Award, shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent determined by the Board; provided, however, that each adjustment to Options shall satisfy the requirements of Treasury Regulation § 1.409A-1(b)(5)(v)(D) (or any successor regulation).


Without limiting the generality of the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to any outstanding Options are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then optionees who exercise such Options between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend.

(b)    Reorganization and Change in Control Events

(i)    Definitions

(A)    A “Reorganization Event” shall mean:

(1)    any merger or consolidation of the Company with or into
another entity as a result of which all of the Common Stock of the Company is converted into or exchanged for the right to receive cash, securities or other property or is cancelled;

(2)    any exchange of all of the Common Stock of the Company
for cash, securities or other property pursuant to a share exchange transaction; or

(3)    any liquidation or dissolution of the Company.

(B)    A “Change in Control Event” shall mean:

(1)    the acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership
of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d 3 promulgated under the Exchange Act) 50% or more of either (x) the aggregate number of shares of Common Stock then-outstanding (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (1), the following acquisitions shall not constitute a Change in Control Event: (A) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (C) any acquisition by any corporation pursuant to a Business Combination (as defined below) which complies with clauses (x) and (y) of subsection (3) of this definition; or

(2)    such time as the Continuing Directors (as defined below) do
not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term “Continuing Director” means at any date a member of the Board (x) who was a member of the Board on the date of the initial adoption of this Plan by the Board or (y) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (y) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or (3) the consummation of a merger, consolidation, reorganization, recapitalization or share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (x) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities


immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company’s assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the “Acquiring Corporation”) in substantially the same proportions as their ownership of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively, immediately prior to such Business Combination and (y) no Person (excluding any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 50% or more of the then-outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination); or

(3)    the liquidation or dissolution of the Company.

(C)    “Good Reason” shall mean any significant diminution in the Participant’s title, authority, or responsibilities from and after such Reorganization Event or Change in Control Event, as the case may be, or any reduction in the annual cash compensation payable to the Participant from and after such Reorganization Event or Change in Control Event, as the case may be, or the relocation of the place of business at which the Participant is principally located to a location that is greater than 50 miles from its location immediately prior to such Reorganization Event or Change in Control Event.

(D)    “Cause” shall mean any (i) willful failure by the Participant, which failure is not cured within 30 days of written notice to the Participant from the Company, to perform his or her material responsibilities to the Company, (ii) willful misconduct by the Participant which affects the business reputation of the Company, (iii) material breach by the Participant of any employment, consulting, confidentiality, non-competition or non-solicitation agreement with the Company, (iv) conviction or plea of nolo contendere (no contest) by the Participant to a felony, or (v) commission by the Participant of any act involving fraud, theft or dishonesty with respect to the Company’s business or affairs. The Participant shall be considered to have been discharged for “Cause” if the Company determines, within 30 days after the Participant’s resignation, that discharge for Cause was warranted.

(ii)    Effect on Options

(A)    Reorganization Event. Upon the occurrence of a Reorganization
Event (regardless of whether such event also constitutes a Change in Control Event), or the execution by the Company of any agreement with respect to a Reorganization Event (regardless of whether such event will result in a Change in Control Event), the Board shall provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof); provided that if such Reorganization Event also constitutes a Change in Control Event, except to the extent specifically provided to the contrary in the instrument evidencing any Option or any other agreement between a Participant and the Company such assumed or substituted options shall become immediately exercisable in full if, on or prior to the first anniversary of the date of the consummation of the Reorganization Event, the Participant’s employment with the Company or the acquiring or succeeding corporation is terminated for Good Reason by the Participant or is terminated without Cause by the Company or the acquiring or succeeding corporation or the Participant’s service on the Board is terminated. For purposes hereof, an Option shall be considered to be assumed if, following consummation of the Reorganization Event, the Option confers the right to purchase, for each share of Common Stock subject to the Option immediately prior to the consummation of the Reorganization Event, the consideration (whether cash, securities or other property) received as a result of the


Reorganization Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Reorganization Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if the consideration received as a result of the Reorganization Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of common stock of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in value (as determined by the Board) to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Reorganization Event. Any substitution of an outstanding Option under this Section 9(b)(ii)(A) shall be made in a manner consistent with the requirements of Treasury Regulation § 1.409A-1(b)(5)(v)(D) (or any successor regulation), in the case of an Option.

Notwithstanding the foregoing, if the acquiring or succeeding corporation (or an affiliate thereof)
does not agree to assume, or substitute for, some or all of such Options, or in the event of a liquidation or dissolution of the Company, the Board shall, upon written notice to the Participants, provide with respect to any Options that are not to be assumed by an acquiring or succeeding corporation that all then unexercised Options will become exercisable in full as of a specified time prior to the Reorganization Event and will terminate immediately prior to the consummation of such Reorganization Event, except to the extent exercised by the Participants before the consummation of such Reorganization Event; provided, however, that in the event of a Reorganization Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Reorganization Event (the “Acquisition Price”), then the Board may instead provide that, subject to Code section 409A, all such outstanding Options shall terminate upon consummation of such Reorganization Event and that each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options and any applicable tax withholdings.

(B)    Change in Control Event that is not a Reorganization Event. Upon
the occurrence of a Change in Control Event that does not also constitute a Reorganization Event,
except to the extent specifically provided to the contrary in the instrument evidencing any Option
or any other agreement between a Participant and the Company, then outstanding Options shall
continue to become vested in accordance with the original vesting schedule set forth in such
Option, provided, however, that each such Option shall be immediately exercisable in full if, on
or prior to the first anniversary of the date of the consummation of the Change in Control Event,
the Participant’s employment with the Company or the acquiring or succeeding corporation is
terminated for Good Reason by the Participant or is terminated without Cause by the Company or
the acquiring or succeeding corporation.

(iii)    Effect on Restricted Stock Awards and Performance Awards

(A)    Reorganization Event that is not a Change in Control Event. Upon
the occurrence of a Reorganization Event that is not a Change in Control Event, the repurchase
and other rights of the Company under each outstanding Restricted Stock Award or Performance
Award shall inure to the benefit of the Company’s successor and shall apply to the cash, securities
or other property which the Common Stock was converted into or exchanged for pursuant to such
Reorganization Event in the same manner and to the same extent as they applied to the Common
Stock subject to such Restricted Stock Award or Performance Award.

(B)    Change in Control Event.



(1)    Restricted Stock Awards. Upon the occurrence of a Change
in Control Event (regardless of whether such event also constitutes a Reorganization Event),
except to the extent specifically provided to the contrary in the instrument evidencing any
Restricted Stock Award or any other agreement between a Participant and the Company, each then
outstanding Restricted Stock Award shall continue to become free from conditions or restrictions
in accordance with the original schedule set forth in such Restricted Stock Award, provided,
however, that each such Restricted Stock Award shall immediately become free from all conditions or restrictions if, on or prior to the first anniversary of the date of the consummation of the Change in Control Event, the Participant’s employment with the Company or the acquiring or succeeding corporation is terminated for Good Reason by the Participant or is terminated without Cause by the Company or the acquiring or succeeding corporation. However, in the event that the acquiring or succeeding corporation does not assume a Restricted Stock Award, then such Restricted Stock Award shall become free from all conditions or restrictions immediately prior to the consummation of such Change in Control Event. Notwithstanding the foregoing, a Restricted Stock Award that is a Performance Award shall be treated pursuant to Section 9(b)(iii)(B)(2).

(2)    Performance Awards. Upon the occurrence of a Change in
Control Event (regardless of whether such event also constitutes a Reorganization Event), except
to the extent specifically provided to the contrary in the instrument evidencing any Performance
Award or any other agreement between a Participant and the Company, the Board shall provide
that all outstanding Performance Awards shall be converted into Restricted Stock or Restricted
Stock Units, as applicable, and assumed by the acquiring or succeeding corporation (or an affiliate
thereof) in accordance with the following procedure: The Board shall use the actual performance
(or target performance, if actual performance cannot be determined) as of the consummation of
the Change in Control Event, to determine the number of shares of Common Stock underlying a
Performance Award to be converted into Restricted Stock or Restricted Stock Units (a “Converted
Performance Award”) and the remainder of the Performance Award shall be terminated; provided
that such conversion and termination shall be contingent upon the consummation of the Change in
Control Event. Any such Converted Performance Awards that are assumed by the acquiring or succeeding corporation (or an affiliate thereof) shall be denominated in the common stock of the
acquiring or succeeding corporation (or an affiliate thereof) and shall vest in full at the conclusion
of the performance period applicable to the original Performance Award, subject to the Participant’s continued employment with the Company or the acquiring or succeeding corporation through the last day of such performance period; provided, however, that each such Converted Performance Award shall immediately become free from all conditions or restrictions if, on or prior to the first anniversary of the date of the consummation of the Change in Control Event, the Participant’s employment with the Company or the acquiring or succeeding corporation is terminated for Good Reason by the Participant or is terminated without Cause by the Company or the acquiring or succeeding corporation. Any Converted Performance Award that becomes vested in accordance with this paragraph shall, to the extent not already delivered to the Participant, be delivered within 10 days of the vesting date. However, in the event that the acquiring or succeeding corporation does not assume a Converted Performance Award, then such Converted Performance Award shall become free from all conditions or restrictions immediately prior to the consummation of such Change in Control Event.

(iv)    Effect on Stock Appreciation Rights and Other Stock Unit Awards

The Board may specify in an Award at the time of the grant the effect of a Reorganization Event
and Change in Control Event on any SAR and Other Stock Unit Award. If the acquiring or succeeding corporation assumes or substitutes an outstanding SAR or Other Stock Unit Award, such assumption or substitution shall be done in the same manner as an Option or a Restricted Stock Award that is not a Performance Award, as applicable, and in addition shall be made in a manner consistent with the requirements of Treasury Regulation § 1.409A-1(b)(5)(v)(D) (or any successor regulation), in the case of an Option. If the acquiring or succeeding corporation does not assume or substitute a SAR, such SAR shall be treated in the same manner as an Option, and if the acquiring or succeeding corporation does not assume or substitute an Other Stock Unit Award that is not a Performance Award, such Other Stock Unit Award shall be treated in the same manner as a Restricted Stock Award that is not a Performance Award.



10.    General Provisions Applicable to Awards

(a)    Transferability of Awards. Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order, and, during the life of the Participant, shall be exercisable only by the Participant, except as may be otherwise provided in an Award agreement; provided, however, that the gratuitous transfer of the Award by the Participant to or for the benefit of any immediate family member, domestic partner, family trust or other entity established for the benefit of the Participant and/or an immediate family member thereof if, with respect to such proposed transferee, the Company would be eligible to use a Registration Statement on Form S-8 for the registration of the sale of the Common Stock subject to such Award under the Securities Act; provided, further, that the Company shall not be required to recognize any such transfer until such time as the Participant and such authorized transferee shall, as a condition to such transfer, deliver to the Company a written instrument in form and substance satisfactory to the Company confirming that such transferee shall be bound by all of the terms and conditions of the Award. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees.

(b)    Documentation. Each Award shall be evidenced in such form (written, electronic
or otherwise) as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan.

(c)    Board Discretion. Except as otherwise provided by the Plan, each Award may be
made alone or in addition or in relation to any other Award. The terms of each Award need not be
identical, and the Board need not treat Participants uniformly.

(d)    Termination of Status. The Board shall determine the effect on an Award of the
disability, death, termination of employment, authorized leave of absence or other change in the
employment or other status of a Participant and the extent to which, and the period during which,
the Participant, or the Participant’s legal representative, conservator, guardian or Designated
Beneficiary, may exercise rights under the Award.

(e)    Withholding. The Participant must satisfy all applicable federal, state, and local or
other income and employment tax withholding obligations before the Company will deliver stock
certificates or otherwise recognize ownership of Common Stock under an Award. The Company may decide to satisfy the withholding obligations through additional withholding on salary or wages. If the Company elects not to or cannot withhold from other compensation, the Participant must pay the Company the full amount, if any, required for withholding or have a broker tender to the Company cash equal to the withholding obligations. Payment of withholding obligations is due before the Company will issue any shares on exercise or release from forfeiture of an Award or, if the Company so requires, at the same time as is payment of the exercise price unless the Company determines otherwise. If provided for in an Award or approved by the Board in its sole discretion, a Participant may satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value; provided, however, except as otherwise provided by the Board, that the total tax withholding where stock is being used to satisfy such tax obligations cannot exceed the Company’s minimum statutory withholding obligations (based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income), except that, to the extent that the Company is able to retain shares of Common Stock having a Fair Market Value that exceeds the statutory minimum applicable withholding tax without financial accounting implications or the Company is withholding in a jurisdiction that does not have a statutory minimum withholding tax, the Company may retain such number of shares of Common Stock (up to the number of shares having a fair market value equal to the maximum individual statutory rate of tax (determined by (or in a manner approved by) the Company)) as the Company shall determine in its sole discretion to satisfy the tax liability associated with any Award.


Shares surrendered to satisfy tax withholding requirements cannot be subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements.

(f)    Amendment of Award. Except as otherwise provided in Sections 5(g) and 6(e)
with respect to repricings or Section 11(d) with respect to actions requiring stockholder approval,
the Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type and changing the date of exercise or realization, provided either (i) that the Participant’s consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant or (ii) that the change is permitted under Section 9 hereof; provided further, notwithstanding anything to the contrary herein, the Board shall have no authority to amend, modify or terminate any outstanding Award that has the same effect of actions expressly prohibited by Section 5(g) and requires approval by the Company’s stockholders.

(g)    Conditions on Delivery of Stock. The Company will not be obligated to deliver
any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously
delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company’s counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations.

(h)    Acceleration. Except as otherwise provided in Sections 5(d), 6(d), 7(b), 8 and 10(i)
with respect to minimum vesting of Awards, the Board may at any time provide that any Award shall become immediately exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. Additionally, notwithstanding the minimum vesting requirements provided in Sections 5(d), 6(d), 7(b), 8 and 10(i), and to the extent permitted by or consistent with Section 409A of the Code, upon the Participant’s termination due to the Participant’s death or disability, the Board may, at the time of grant or at any other time, provide that such Participant’s award shall immediately become vested and/or exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be, regardless of whether the first anniversary of the date of grant has occurred.

(i)    Performance Awards. Restricted Stock Awards and Other Stock Unit Awards under
the Plan may be made subject to the achievement of performance goals pursuant to this Section 10(i) (“Performance Awards”), subject to the limit in Section 4(c) on shares covered by such grants. Performance Awards can also provide for cash payments of up to $2,000,000 per calendar year per individual. Subject to Section 10(h), Performance Awards shall not vest prior to the first anniversary of the date of grant. If Dividends or Dividend Equivalents are granted in connection with a Performance Award, such Dividend or Dividend Equivalent shall be paid only if the performance goal or goals associated with such Performance Award are satisfied. The Committee shall have the power to impose such other restrictions on Performance Awards as it may deem necessary or appropriate.

11.    Miscellaneous

(a)    No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award.



(b)    No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares.

(c)    Effective Date and Term of Plan. The Plan was adopted by the Board on September
28, 2023.

(d)    Amendment of Plan. The Board may amend, suspend or terminate the Plan or any
portion thereof at any time; provided, however, that, to the extent determined by the Board, no
amendment requiring stockholder approval under any applicable legal, regulatory or listing requirement shall become effective until such stockholder approval is obtained.

(e)    Authorization of Sub-Plans. The Board may from time to time establish one or
more sub-plans under the Plan for purposes of satisfying applicable blue sky, securities or tax laws of various jurisdictions. The Board shall establish such sub-plans by adopting supplements to this Plan containing (i) such limitations on the Board’s discretion under the Plan as the Board deems necessary or desirable or (ii) such additional terms and conditions not otherwise inconsistent with the Plan as the Board shall deem necessary or desirable. All supplements adopted by the Board shall be deemed to be part of the Plan, but each supplement shall apply only to Participants within the affected jurisdiction and the Company shall not be required to provide copies of any supplement to Participants in any jurisdiction which is not the subject of such supplement.

(f)    Provisions for Foreign Participants. The Board may modify Awards or Options granted to Participants who are foreign nationals or employed outside the United States or establish subplans or procedures under the Plan to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters.

(g)    Compliance with Code Section 409A. It is intended that the provisions of the Plan
and any Award granted thereunder comply with or be exempt from Section 409A of the Code and
the Treasury regulations thereunder (together, “Section 409A”), and all provisions of the Plan and any Award shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A. If an Award that is subject to Section 409A is payable upon a Change in Control Event which is not a permissible payment event or time (as described in Treasury Regulation § 1.409A-3) then, for purposes of payment of such Award, no Change in Control Event shall be deemed to have occurred with respect to that Award unless and until there occurs a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company (within the meaning in accordance with Treasury Regulation § 1.409A-3(i)(5)). To the extent required or advisable to avoid a violation of Section 409A, no discretion to require payment of an Award that is subject to Section 409A upon a Change in Control Event shall be exercised if not set forth in writing by the time required under Section 409A. If an Award is subject to Section 409A and payment is due upon a termination of employment or service, payment shall only be made if such termination constitutes a “separation from service” within the meaning of Section 409A. If an Award is subject to Section 409A and payment is due upon a Participant’s disability, payment shall be made upon a
determination by the Administrator that the Participant is disabled within the meaning of Treasury
Regulation § 1.409A-3(i)(4). If an Award is subject to Section 409A, any payment made to a Participant who is a “specified employee” (within the meaning of Section 409A) of the Company or any Subsidiary shall not be made before the date that is six months after the Participant’s “separation from service” (within the meaning of Section 409A) to the extent required to avoid the adverse consequences of Section 409A. Nothing in this Plan or in an Award agreement shall be interpreted or construed to transfer any liability for any tax (including a tax or penalty due as a result of a failure to comply with Section 409A) to the Company or to any other individual or entity, and the Company shall have no liability to a Participant, or any other party, if an Award that is intended to be exempt from, or compliant with, Section 409A is not so exempt or compliant.



(h)    Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, excluding choice-of-law principles of the law of such state that would require the application of the laws of a jurisdiction other than such state.

Approved by the Compensation Committee of the Board of Directors of Emergent BioSolutions Inc. on September 27, 2023

Approved by the Board of Directors of Emergent BioSolutions Inc. on September 28, 2023

EX-10.2 3 formofletteragreementdated.htm EX-10.2 Document
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July 25, 2023

[Name]
[Address]

Via Email:

RE: Key Employee Retention Program

Dear [Name]

In recognition of your continuing key role at Emergent BioSolutions Inc. (the "Company"), the Board of Directors of the Company (the "Board"), has determined that you will receive a retention bonus and an enhancement to your existing senior management severance plan (“SMSP”) upon the terms and conditions set forth in this letter agreement (this “Agreement”). Please refer to Appendix A for certain defined terms used herein.

1. Retention Bonus. You will receive a retention bonus of $_____________ (the "Retention
Bonus"), payable in two (2) installments; the first installment being $___________, representing fifty percent (50%) of the Retention Bonus and payable as soon as administratively practicable, but in no event later than 30 calendar days after the execution of this Agreement, and the second installment being $___________, the remaining 50% of the Retention Bonus payable at the end of the Retention Period (as defined below).

2. Retention Period and Clawback. Subject to the terms and conditions of this Agreement, your
right to retain the Retention Bonus will be subject to your continued employment through the end of the Retention Period. The "Retention Period" begins on the date of this Agreement and ends on the earlier of the date that is (i) one year after the date of this Agreement and (ii) thirty (30) days following any of (a) termination of employment without Cause or resignation for Good Reason, (b) the consummation of a Change of Control transaction, (c) the Company's emergence from any chapter 11 case filed with the United States Bankruptcy Court pursuant to chapter 11 of Title 11 of the United States Code, (d) the date in which the United States Bankruptcy Court enters an order of conversion from a chapter 11 case described in clause (ii)(c), or (e) dismissal of a chapter 11 case described in clause (ii)(c). If prior to the end of the Retention Period you voluntarily terminate your employment with the Company (other than as a result of your death or Disability) or if your employment is terminated by the Company for Cause, you hereby agree that you will re-pay to the Company the portion of the Retention Bonus that you received, less applicable taxes, payable within 30 days following receipt of written notice from the Company.

3. Effect on Other Compensation. By acceptance of this Agreement, you agree that the
Retention Bonus is in lieu of any annual cash incentive bonus that otherwise may be payable to you with respect to the 2023 calendar year under the Company's 2023 cash incentive plan, payable in March 2024, and you hereby waive any right to receive such bonus under any such plan.

4. Enhanced Severance Benefit. During the Retention Period, in the event your employment ends due to a termination of employment without Cause or resignation for Good Reason, your Applicable Percentage of Compensation and Severance Payment and Benefits Continuation Period as defined in the SMSP will be the same percentage amount and months duration, respectively, as applied in a Termination without Cause – Change in Control event.

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All other benefits under the SMSP are unchanged.

5. Application of 409A. The payments and benefits under this Agreement are intended to be exempt from Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and guidance promulgated thereunder (collectively “Section 409A") and, accordingly, to the maximum extent permitted this Agreement will be interpreted to be exempt from Section 409A. Notwithstanding the foregoing, the Company makes no representation with
respect to compliance with Section 409A and is not liable to you for any taxes or penalties under Section 409A.

6. Assignment. You may not assign your rights under this Agreement other than assignment of rights upon your death. The Company may assign its obligations hereunder to any successor in interest, including any acquirer of all or substantially all the assets of the Company.

7. Entire Agreement; Other Agreements. This Agreement sets forth the entire understanding of the Company and you regarding the subject matter hereof, and supersedes all prior agreements, understandings and inducements, whether express or implied, oral or written. This Agreement does not modify, amend or supersede any of the rights or obligations of either party under any terms of any employment contract, offer letter of employment or compensation plan, policy or arrangement of the Company, including, without limitation, the SMSP except as otherwise modified herein, any non-competition, non-solicitation or other restrictive covenant under any employment, SMSP, or other agreement between you and the Company which are hereby reaffirmed by you in consideration of your eligibility for the Retention Bonus. No modification or amendment of this Agreement will be effective without a prior written agreement signed by you and the Company.

8. Confidentiality. You hereby agree, to the maximum extent permitted by law, to keep confidential the existence and the terms of this Agreement provided, however, that (i) you may disclose the terms of this Agreement to your immediate family members or members of your household, and financial or legal representatives or advisers who reasonably need to have access to such information to provide services to you, provided that you have made such family members, representatives, and advisors aware of the confidential nature of such information prior to disclosure, and (ii) you may disclose the terms of this Agreement if required to do so by any applicable legal requirement so long as reasonable prior notice of such required disclosure is given to the Company.

9. Notices. All notices, approvals and other communications required or permitted to be given under this Agreement must be in writing and will be validly served or given if delivered in person, electronically (with read receipt acknowledgment), mailed by first class mail (registered or certified, return receipt requested), or overnight air courier with proof of delivery (i) if to the Company, at its principal corporate offices addressed to the attention of the Chief Human Resources Officer, and (ii) if to you, at your home address as such address may appear on the records of the Company, or to such other address as such party may hereafter specify in written notice to the other party.


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10. Governing Law; Waiver of Jury Trial. To the maximum extent permitted by law, this Agreement is governed by and to be construed in accordance with the laws of the State of Delaware, without regard to conflicts of law principles thereof. The parties to this Agreement each hereby irrevocably submits to the non-exclusive jurisdiction of Maryland or federal court of Maryland in any action or proceeding arising out of or relating to this Agreement, and all parties hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in Maryland or federal court of Maryland and hereby irrevocably waive to the fullest extent that they may legally do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.

11. Tax. Amounts payable under this Agreement are subject to withholding for any federal, state and local income and employment taxes as required to be withheld pursuant to any applicable law or regulation.

12. Waiver. Failure by either party to exercise, or any delay in exercising any right or remedy provided under this Agreement or by law does not constitute a waiver of that or any other right or remedy nor will it prevent or restrict any further exercise of that or any other right or remedy.

13. Severability. In case any provision in this Agreement is or is found to be invalid, illegal, or
unenforceable, the validity, legality, and enforceability of the remaining provisions are not in any way affected or impaired thereby.

14. Counterparts. This Agreement may be executed in two or more counterparts and by the different parties as separate counterparts, each of which when executed is deemed to be an original but all of which taken together constitutes one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement electronically (including portable document format (pdf.)) or by facsimile is as effective as delivery of a manually executed counterpart of this Agreement.

To accept this. Agreement please sign where indicated below and return no later than July 26, 2023 to Jennifer Fox at foxj@ebsi.com or Michelle Pepin at pepinm@ebsi.com.

This Agreement cannot be accepted by you after July 26, 2023.

Sincerely,
Emergent BioSolutions, Inc.


_______________________________________________
Haywood Miller, Interim Chief Executive Officer Definitions.





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ACCEPTED AND AGREED AS OF THE DATE FIRST SET FORTH ABOVE:


____________________________________________
Signed by: [NAME]











































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APPENDIX A

For purposes of this Agreement, the following terms have the meanings as set forth below:

“Cause” means each of the following that results in demonstrable harm to the
Company’s financial condition or business reputation: (1) Participant’s conviction of or
plea of guilty or no contest to any felony or crime of moral turpitude; (2) Participant’s
dishonesty or disloyalty in performance of duties; (3) conduct by the Participant that
jeopardizes the Company’s right or ability to operate its business; (4) violation by the
Participant of any of the Company’s policies or procedures, (including without limitation
employee workplace policies, anti-bribery policies, insider trading policy, communications policy, etc) if uncured within two weeks of written notice by the Company; or (5) Participant’s willful malfeasance, misconduct, or gross neglect of duty.

"Change of Control" means an event or occurrence set forth in any one or more of subsections (a) through (d) below, including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection, provided that such event or occurrence constitutes a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company, as defined in Treasury Regulation §§ 1.409A-3(i)(5):
(a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) 20% or more of
either (x) the then-outstanding shares of common stock of the Company (the
“Outstanding Company Common Stock”) or (y) the combined voting power of
the then-outstanding securities of the Company entitled to vote generally in the
election of directors (the “Outstanding Company Voting Securities”); provided,
however, that for purposes of this subsection (a), the following acquisitions do
not constitute a Change in Control: (i) any acquisition directly from the Company
(excluding an acquisition pursuant to the exercise, conversion or exchange of any
security exercisable for, convertible into or exchangeable for common stock or
voting securities of the Company, unless the Person exercising, converting or
exchanging such security acquired such security directly from the Company or an
underwriter or agent of the Company), (ii) any acquisition by the Company or an
Excluded Person, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section; or

(b) at such time as the Incumbent Directors do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the
Company); or

(c) the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a “Business Combination”), unless, immediately following such

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Business Combination, each of the following two conditions is satisfied: (i) all or
substantially all of the individuals and entities who were the beneficial owners of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 50% of the then-outstanding shares of common
stock and the combined voting power of the then-outstanding securities entitled
to vote generally in the election of directors, respectively, of the resulting or
acquiring corporation in such Business Combination (which includes,
without limitation, a corporation which as a result of such transaction owns the
Company or substantially all of the Company’s assets either directly or through
one or more subsidiaries) (such resulting or acquiring corporation is referred to
herein as the “Acquiring Corporation”) in substantially the same proportions as
their ownership, immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, respectively; and (ii) no Person (excluding any employee benefit plan
(or related trust) maintained or sponsored by the Company or by the Acquiring
Corporation) beneficially owns, directly or indirectly, 20% or more of the then
outstanding shares of common stock of the Acquiring Corporation, or of the
combined voting power of the then-outstanding securities of such corporation
entitled to vote generally in the election of directors (except to the extent that
such ownership existed prior to the Business Combination); or

(d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

“Disability'' means that you are unable, as reasonably determined by the Board, to perform your duties for a period of 90 consecutive days as a result of physical or mental impairment or illness or injury.

“Good Reason” means, except as otherwise specified by the Chief Executive Officer
of the Company at the time a Participant is designated as a Participant of the SMSP (provided that such exception does not adversely affect such Participant), with respect to such a Participant, (i) a decrease in (or failure to increase in accordance with the terms of any employment contract) the Participant’s base salary or bonus opportunity, (ii) a diminution in the aggregate employee benefits and perquisites provided to the Participant, (iii) a diminution
in the Participant’s title, reporting relationship, duties or responsibilities, (iv) relocation
of the Participant’s primary office more than 35 miles from its current location, or (v) the
failure by any successor to the Company or any Acquiring Corporation (as defined in
Section 1(E)(c)) to explicitly assume this Plan and the Company’s obligations hereunder
and maintain the Plan in effect for a period of at least eighteen (18) months.

EX-31.1 4 a311-millercert093023.htm EX-31.1 Document

EXHIBIT 31.1
CERTIFICATION
I, Haywood Miller, certify that: 

(1)    I have reviewed this Quarterly Report on Form 10-Q of Emergent BioSolutions Inc.;
    
(2)    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
    
(3)    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
    
(4)    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
    
(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
    
(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
    
(c)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
    
(d)    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
    
(5)    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
    
(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information, and
    
(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: December 11, 2023

/s/HAYWOOD MILLER
Haywood Miller
Interim Chief Executive Officer

EX-31.2 5 a312-lindhalcert093023.htm EX-31.2 Document

EXHIBIT 31.2
CERTIFICATION
I, Richard S. Lindahl, certify that: 

(1)    I have reviewed this Quarterly Report on Form 10-Q of Emergent BioSolutions Inc.;
    
(2)    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
    
(3)    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
    
(4)    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
    
(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
    
(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
    
(c)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
    
(d)    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
    
(5)    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
    
(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information, and
    
(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: December 11, 2023

/s/RICHARD S. LINDAHL
Richard S. Lindahl
Chief Financial Officer

EX-32.1 6 a321-millercert093023.htm EX-32.1 Document

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Emergent BioSolutions Inc. (the "Company") for the period ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Haywood Miller, Interim Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 11, 2023

/s/HAYWOOD MILLER
Haywood Miller
Interim Chief Executive Officer




EX-32.2 7 a322-lindhalcert093023.htm EX-32.2 Document

EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Emergent BioSolutions Inc. (the "Company") for the period ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Richard S. Lindahl, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 11, 2023

/s/RICHARD S. LINDAHL
Richard S. Lindahl
Chief Financial Officer